RHB Bank Singapore expects Oversea-Chinese Banking Corporation (OCBC) to report stronger earnings for 3QFY2023 ended September.
OCBC boasts the “strongest asset quality metrics” among the three Singapore banks, which RHB analysts believe will be a potential differentiating factor in a higher-for-longer interest rate environment.
While OCBC remains RHB’s top pick among its peers, the research house remains “neutral” on OCBC in a Oct 16 note with a target price of $13.70, which represents a 6% upside against its last traded price. RHB’s target price includes a 2% environmental, social and governance (ESG) premium, based on RHB’s in-house methodology.
OCBC is scheduled to announce its results on Nov 10. Loan growth is expected to stay muted, say the analysts, mainly due to softness in trade-related financing given the weakness in China’s economic environment.
“For now, mortgage growth is still stable thanks to steady drawdowns in the mortgage pipeline while certain non-trade loans have been decent. OCBC had guided for low- to mid-single-digit loan growth in its 2QFY2023 results briefing, and we expect the 3QFY2023 trend to be within guidance,” they add.
Meanwhile, OCBC’s healthy liquidity should lead to easing of deposit cost pressures. “OCBC has seen further net new money inflows in 3QFY2023, and coupled with the softness in loan growth, funding cost pressures remain benign.”
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Fixed deposit rates have slipped from the peak of over 4% earlier this year to under 3% currently. Together with July’s US Federal Funds Rate hike, management was cautiously optimistic that net interest margin (NIM) could stay elevated in 2HFY2023 and match the 2.28% level in 1HFY2023, which would comfortably meet the guidance of above 2.2%.
OCBC’s fees will soften, says RHB. “Despite some earlier optimism in early 3QFY2023 that market sentiment could be turning for the better, this had been dampened by subsequent concerns with respect to a higher-for-longer interest rate environment. As such, wealth management activities have been subdued with net new money inflows largely parked in fixed deposits.”
Meanwhile, trade- and loan-related fees will reflect continued softness in loan growth, adds RHB. “We see insurance and non-customer flow trading income as the key swing factors that could impact the 3QFY2023 bottomline trend.”
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OCBC’s operating expenses are “well-controlled” but catch-up spending in 2HFY2023 is a possibility, according to RHB analysts. “1HFY2023 opex was well-controlled, up 5% y-o-y compared to 1HFY2023 operating income growth of 30% y-o-y.”
Consequently, OCBC’s 1HFY2023 cost-income ratio (CIR) improved “massively “to 37.8% from 47.1% in 1HFY2022. “Assuming operating income growth stays robust, there could be some catch-up spending in 2HFY2023 relating to IT and talent, among others. However, OCBC does not expect opex growth to exceed high-single-digit.”
RHB is still comfortable with OCBC’s asset quality. “OCBC has still not seen any red flags on asset quality and expects to meet its 20 basis points (bps) credit cost guidance. Recall that 2QFY2023 credit cost rose 19 bps q-o-q to 31 bps as the bank bulked up on loan loss coverage. We expect credit cost to trend lower towards the guided run rate in 3QFY2023, and this would be the key driver for sequential net profit growth.”
As at 11.26am, shares in OCBC are trading 8 cents higher, or 0.61% up, at $13.08.
