2Q23F preview & Greater China connectivity
- We expect softer qoq earnings in 2Q23F. NIMs could start tapering as risk-off momentum weighs on wealth management. Credit cost should stay benign.
- OCBC believes its ASEAN-Greater China connectivity could drive S$3bn in incremental revenue over FY23-25F. ROE translation was not disclosed.
- Retain Add. Possible upwards revision to NIM guidance could catalyse share price, whilst we wait for risk-on sentiment to drive wealth management flows.
2Q23F preview: expect softer NIMs and benign credit costs
We expect 2Q23F net profit to soften to c.S$1.74bn (-8% qoq, +17% yoy). We think NIMs could slide several bp given heightened funding cost pressures. Wealth management income could also be lacklustre amid continued risk-off sentiment following the banking system fallouts in 1Q23, in our view. Credit costs should stay benign, within its guidance (c.15-20bp) in 2Q23F, though we do not rule out management overlay top-ups. The stability of insurance income given its adoption of SFRS(I) 17 will take time and could be a swing factor in the upcoming earnings, in our view. OCBC will report 2Q23F earnings on 4 Aug.
Unveiling its One Group strategy
OCBC hosted an update session on 3 Jul 2023 to unveil its One Group approach to capitalise on sizeable ASEAN-Greater China opportunities. As part of the process of unifying its brand, legal name changes were made for its various banking entities in the region. OCBC also launched a unified refreshed logo to align the branding of these entities.
Projecting S$3bn in incremental revenue; details to come in 2Q23F
Cross-border trade/wealth/investment flows lie at the centre of the bank’s strategy, culminating in management’s projection of c.S$3bn in (cumulative) incremental revenue over FY23-25F, which comes on top of its current growth trajectory. While the bank aims for better operational efficiency (and therefore lower CTI), specific details on accompanying cost growth expectations were not disclosed. Management guided for the underlying assumptions of this revenue goal to be shared during its 1H23F earnings briefing.
Wholesale banking and wealth management as key drivers
Thematically, the key drivers of the bank’s revenue projections are its wholesale banking and wealth management segments (from both consumer financial services and Bank of Singapore). On wholesale banking, OCBC said it will focus on enhancing its transaction banking, IB capabilities in Greater China, and SME coverage in Hong Kong. On its wealth segment, hiring more relationship managers and raising AUM is its game plan.
Reiterate Add; 6.5% dividend yield in FY23F is attractive
We reiterate Add given strong dividend visibility with a CET1 of c.16%; we expect c.32 Scts 1H23F DPS (1H22: 28 Scts). Downside risks include asset quality deterioration. We think the translation of OCBC’s revenue projections into longer-term ROE is unclear and may not be perceived as a clear re-rating catalyst. Higher NIM guidance (given the Fed rate’s current trajectory) could catalyse the stock. Our TP remains at S$13.50, based on GGM.
ASEAN-Greater China connectivity to drive its strategy
The key drivers of the bank’s revenue projections are its wholesale banking and wealth management segments (from both consumer financial services and Bank of Singapore), according to OCBC. Two key points underpin these drivers, namely i) OCBC services the top 7 markets in ASEAN, which cover c.98% of economic growth in the region, and ii) OCBC is among the top 5 foreign players in Greater China by total assets, according to OCBC.
Key points in OCBC’s strategy:
Wholesale banking
i) Accelerate investment in transaction banking capabilities in Greater China
- By adding >S$50m in investments over the next three years
- Target >500 regional mandates over the next five years
ii) Enhance IB capabilities in Greater China
- Aim to double IB revenue in three years via debt issuance and syndication, and
advising and financing cross-border corporate finance deals
iii) Enhance coverage of Greater China corporates in ASEAN
- Target >50% increase in Greater China franchise revenue in ASEAN by 2025F (from 2022: S$2.5bn to 2025F: S$3.8bn, OCBC’s guidance)
Wealth management
Consumer banking:
- target to double relationship managers and AUM for Greater China by 2025F
Bank of Singapore:
- target to achieve S$145bn AUM (from S$124bn currently) and 500 RMs (from 400 in Jun 23) by 2025F
As indicated by system loans, we expect OCBC’s loan growth in 2Q23F to remain rather muted (+0.3% qoq). We expect NIMs to start tapering off (-4bp qoq) on the back of elevated funding cost pressures. Although Singapore banks have started to reduce their fixed deposit (FD) rates (as of 4 Jul 2023, OCBC’s FD rate has been cut to 2.7% for a six-month placement, from its peak of c.4% at end-2022), we believe it will take time for these placements to run off.
We think that wealth management fees could be softer qoq in 2Q23F as risk-off sentiment remains post-banking crises in Mar 23. We await more clarity on steady-state insurance income given the adoption of SFRS(I) 17 standards in 1Q23.
CTI could creep up slightly on a qoq basis in 2Q23F on the back of salary adjustments during the quarter.
We expect asset quality to stay rather resilient, equating to credit costs being relatively benign in 2Q23F. That said, we do not discount the possibility of management overlay top-ups. A prime asset quality concern in recent months is the bank’s commercial real estate portfolio, in our view. Developed markets’ (UK, US, AU, etc.) commercial RE made up c.10% of total loans, according to data from OCBC. We understand that these exposures are largely backed by strong sponsors. OCBC views this portfolio to be resilient.
Re-rating catalyst and downside risk
Stronger and sustainable treasury income and wealth management fees are key potential re-rating catalysts. A significant deterioration in asset quality as a result of the higher interest rate environment is a downside risk. A dilutive M&A (given its buffer of excess capital) could be another downside risk.