- Systemic asset quality risks were not detected, but we expect credit costs to hover at current levels; sustained NIMs should still support yoy earnings.
- MAS’s penalty of a 1.3x multiplier on OCBC’s operational RWA has been lifted. We estimate a pro-forma c.30bp lift to its CET1 ratio in 4Q23F.
- Reiterate Add, with GGM-based TP unchanged. CET1 upside gives hope of higher DPS in 2H23F. Valuations are attractive at 1x FY24F P/BV.
Macroeconomic uncertainties may pressure credit cost
As macroeconomic uncertainties abound (inflationary pressures, geopolitical uncertainties, interest rate trajectory), OCBC’s management said in its 3Q23 analyst briefing that it will only give its FY24F outlook statement at its 4Q23F earnings update in Feb 24 when business visibility improves. Management shared that it is on track towards its target of a revenue growing by c.S$3bn over FY23-25F; it added that it had not detected any systemic risks in its portfolio at this point. Its total non-performing assets (NPAs) were lower qoq in 3Q23 from the recovery of two sizeable exposures — a real estate exposure in China (classified NPL in 3Q22) and a project-finance-related loan (turned NPL in 4Q21). That said, specific provisions (as reported) were considerably higher at 21bp in 3Q23 (vs. 6bp quarterly average over the past 4 quarters). OCBC shared that these weaknesses were broad-based in terms of sector and geography. To this end, we raise our FY23-25F credit cost (calculated based on total allowances) expectations to c.23-25bp (from c.20bp previously; 3Q23: c.25bp) as we bake in the more challenging operating conditions ahead.
1.3x multiplier penalty on operational RWA from MAS removed
A key takeaway from this briefing was that OCBC confirmed that the capital penalty — 1.3x multiplier on operational risk-weighted assets (RWA) imposed by the Monetary Authority of Singapore (MAS) in May 22 in relation to deficiencies in the bank’s response to the SMS phishing scams in Dec 21 — had been lifted in Oct 23. On a pro-forma basis, we estimate that OCBC’s CET1 would come up to a higher 15.1% (vs. 14.8% in 3Q23) with the removal of the penalty. We believe that this sets the scene for potentally higher-than-expected DPS in 2H23F. We have penciled in c.80Scts for FY23F (1H23: 40Scts declared) — in line with management’s c.50% dividend payout guidance.
Higher-for-longer Fed rates should sustain NIMs in FY24F
We highlight that OCBC’s updated NIM guidance of c.2.25% in FY23F (vs. above c.2.2% previously) implies weaker NIMs in 4Q23F, reflecting its expectations of higher funding costs to come amid potentially stiffer deposit-pricing competition (3Q23 exit NIM of 2.23% vs. 3Q23 quarterly NIM of 2.27%). Beyond 4Q23F, we think that margin stabilisation would largely depend on liquidity management, as most of its loans have already been repriced at higher interest rates over the past 18 months. That said, the higher-for-longer Fed rate scenario should sustain NIMs at c.2.1-2.2% in FY24F, in our view. Reiterate Add and TP. Asset quality deterioration given the elevated interest rates are a downside risk.