Robust net interest income amid lingering office portfolio concerns
- 3Q23 revenue and net profit surpass estimates on higher net interest income and non-interest income
- Management raised full-year net interest income guidance and slightly higher non-interest expense
- Cautious tone continues for commercial real estate (CRE) office portfolio, which contributes to 3% of total loans outstanding
Encouraging 3Q23 revenue and net profit beat. Net profit increased by 65% y-o-y/17% q-o-q to US$5.5bn and adjusted earnings per share of US$1.39 came in ahead of consensus estimates of US$1.24. Total revenues grew 7% y-o-y/2% q-o-q to US$20.9bn, above consensus estimates of US$20.1bn, attributable to higher net interest income (+8% y-o-y/flat q-o-q) and non-interest revenue (+4% y-o-y/+5% q-o-q) while expenses declined 8% y-o-y (mainly on US$1.9bn lower operating losses) but increased 1% q-o-q. Credit costs of US$1.2bn (+53% y-o-y/-30% q-o-q) was driven by US$300m increase in allowance for credit losses for commercial real estate office portfolio and growth in credit card portfolio. CET1 ratio of 11.0% is above regulatory requirement of 8.9% (decreased due to lower stress capital buffer of 2.9%), after US$1.5bn of common stock repurchases. Loans remained flat y-o-y/declined 1% q-o-q to US$942bn while deposits declined 3% y-o-y/grew 1% q-o-q to US$1.4tr.
Management raised full-year net interest income guidance; cautious tone continues for commercial real estate (CRE) office portfolio. Management raised guidance for full-year net interest income to c.US$52.2bn (c.16% higher than US$45.0bn in FY22 vs previous guidance: c.14% higher) as the bank continues to benefit in the higher-for-longer interest rate environment. Management also guided for slightly higher non-interest expense (excluding operating losses) of US$51.5m in FY23 than previous guidance of US$51.0bn on its outstanding litigation, regulatory and customer remediation matters, though it is still lower than that in FY22. The cautious stance of management on its CRE office portfolio (-3% q-o-q to US$32.2bn; 3% of total loans outstanding) persisted due to the high vacancy rates and weak office market, but management provided reassurance on the monitoring and derisking efforts of the portfolio, while noting that the CRE office portfolio has yet to see many trades as price discovery is still ongoing.