Two consecutive quarters of highest NIM expansion amongst peers
3Q22 results ahead of consensus. 3Q22 revenue of S$3.2bn grew 23% y-o-y/9% q-o-q while net profit of
S$1.6bn improved 31% y-o-y/8% q-o-q, ahead of consensus and our expectations. Net interest income
of S$2.1bn rose 44% y-o-y/23% q-o-q, driven by stronger-than-expected NIM of 2.06% that increased 35bps q-o-q due to an increase in improved margins across key markets on higher asset yields outpacing the rise in funding costs. OCBC’s 3Q22 NIM expansion came in the highest amongst the three Singapore banks, following a 16bps q-o-q NIM improvement in 2Q22, also the highest amongst peers. Operating costs increased by 7% y-o-y/1% q-o-q, mainly due to higher staff costs. Cost-to-income ratio improved to 40.3% (2Q22: 43.5%) on positive jaws. Capital ratio stood strong with a healthy CET1 ratio of 14.4% (2Q22: 14.9%).
Weaker non-interest income. Non-interest income came in at S$1.1bn, a decline of 4% y-o-y/11% q-o-q. Net fee and commission income fell 20% y-o-y/5% q-o-q, mainly due to lower wealth management fees amid the soft market sentiment partly offset by higher credit card and loan and trade-related fees. Trading income also declined 27% q-o-q on lower non-customer flow treasury income.
Higher credit costs and allowances. 3Q22 credit costs normalised to 14bps (2Q22: 8bps) with management revising FY22F guidance downwards to the low to mid-teens (prev: 20-25bps), as 9M22 credit costs are at 9bps. Allowances included a S$47m impairment for OCBC’s overseas properties and macroeconomic variable (MEV) adjustments in the Expected Credit Loss (ECL) model to reflect market conditions.
Total loan allowances for 3Q22 were higher at S$154m, 14bps (2Q22: S$72m, 8bps); including general allowances (stage 1+2) of S$76m, 7bps (2Q22: S$66m, 8bps); and special allowances (stage 3) of S$78m, 7bps (2Q22: S$6m, 0bps). New NPA formation was higher q-o-q at S$468m (2Q22: S$182m), offset by recoveries of S$669m in the quarter (2Q22: S$419m), mainly from corporate and consumer accounts in Malaysia and Indonesia as the relief programmes end. NPL ratio fell to 1.2% (2Q22: 1.3%), though there is a q-o-q increase in Greater China NPLs, largely related to one network customer name, which is highly secured, with LTV less than 60%.
Takeaways from analyst briefing
NIM outlook. OCBC continues to see good improvement from higher interest rates, as 90% of its SGD loans and 100% of USD loans are on a floating basis. Management guides for full-year NIM of 1.8%-1.9% this year, implying a c.2.3% NIM in 4Q22, while September exit NIM was 2.15%, while it expects a FY23 NIM of 2.1% minimally. Management believes 1Q23 NIM will still see a q-o-q expansion but NIM improvement could start slowing afterwards, as it expresses caution on deposit repricing as CASA continues to decline and fixed deposit rates are higher. Nonetheless, management is confident that FY23 NIM will still be higher than FY22 NIM.
Credit costs outlook. Low to mid-teen credit costs likely to hold for FY23F, barring idiosyncratic occurrences, but management will update on FY23F guidance formally next quarter. There is noise from Malaysia’s loan relief programme, but as the relief programme comes to an end, more recoveries are seen in these two quarters’ numbers. Relief loans are now down to 0.2% of the loan book compared to a high single digit in 2020. Management sees Malaysia and Indonesia on a path of steadier recovery while it feels it is only a matter of time before China reopens. Management is also seeing some pick up in NPLs in the consumer book pertaining to secured loans, but overall, asset quality is healthy and there are no systemic risks.