Helen Wong, group CEO of Oversea-Chinese Banking Corp, on August 4 gave new guidance following the release of the banking group’s 1HFY2023 results for the six months to June 30.
As per normal, analysts and media focused on the outlook for net interest margins (NIM). Previously following its 1QFY2023 results, OCBC has raised its NIM outlook to around 2.2%; it is likely to remain above 2.2% for the rest of the year as the “exit” NIM in 2Q2023 was 2.26%,
“At 2.26%, NIM could stay stable, maybe with the prospect of one more rate hike. Our view is rates will stay longer at this level," says group CFO Goh Chin Yee.
New Asean focus announced in July
During a media and analysts’ sojourn in Hong Kong in July, OCBC launched its refreshed brand and strategy, which aims to deliver $3 billion in incremental revenue with an Asean-Greater China focus. This new focus will deliver the incremental revenue by 2025, which in turn will account for 1 percentage point of ROE which is estimated at 13% to 14%.
“We have a refreshed OCBC logo to solidify our One Group approach and we also have a new tagline, For Now and Beyond,” Wong adds.
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In terms of timeline, 1/6 of the $3 billion will be delivered this year, a third will be delivered next year, and the remaining one half in 2025.
“It takes a bit of time to add on more customers to increase the wallet share of the customers to improve, and continue to invest in products, in digitalisation, in the way we work in how we identify opportunities, in building a new customer base leading to acquisition of new customers for example along the supply chain, and also supporting continuously our network customers as they continue to venture into different geographies [and sectors],” Wong elaborates.
For the additional $3 billion income target, wealth, investment and trade flows are likely to account for 70% of the incremental revenue, with sustainability-related and new economy related businesses to contribute 30% of revenue.
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The refreshed strategy is based on four pillars. These are: capture rising Asian wealth with the Singapore-Hong Kong hubs and digital propositions; support increasing Asean-Greater China trade and investment flows; unlock value from New Economy and high-growth industries; and drive the transition to a sustainable low-carbon world. Wong has led an initiative in Singapore and Malaysia to grow more mangrove swamps which are known to be great sequesters of carbon.
Among the ‘supporting pillars’, is the banking group’s capital and risk management strengths. “For the first pillar in deepening our private banking franchise we have started to hire more RMs. In Greater China we added 20. We’ve set up more trust and family office accounts,” Wong says. “We have expanded our China Business Office by adding new hires in Malaysia, Indonesia and Vietnam.”
Since the launch of the refreshed strategy in July, Wong indicates that the bank has seen a steady increase in trade and investment flows into Asean.
OCBC has also improved its digital SME model, which helped to onboard new-to-bank customers regionally.
Some new metrics
Other new guidance includes a cost-to-income ratio at the low end of the 40% to 45% range, and credit costs of around 20 bps which is at the high end of 1QFY2023’s 15-20 bps range.
In 1HFY2023 and 2QY2023, OCBC increased its ECL 1 and 2 allowances (formerly general provisions or GP). Notably, 2Q2023 general provisions were higher q-o-q and y-o-y causing total credit costs to rise to 31 bps versus 12 bps in 1QFY2023, and just 8 bps a year ago.
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ECL 1 and 2 allowances are for non-impaired assets. According to CFO Goh, these higher ECL allowances are set aside because of changes in risk profiles, macro-economic variables updates and management overlays.
Goh revealed that around 40% of its $2.49 billion in cumulative general provisions (as at June 30) are management overlays. This compares with more than $2 billion for DBS and around $1.5 billion for UOB.
Commercial real estate
At any rate, OCBC’s allowance coverage of 131% is higher than peers, so it has plenty of cushion. NPLs fell q-o-q due to recoveries and upgrades in Singapore, Malaysia and Indonesia. These were partly offset by a rise in “Rest of the World” NPLs, mainly from the downgrade of a corporate account in the Commercial Real Estate (CRE) sector in the US.
Banks are always reluctant to reveal who their customers are. Still, according to announcements, OCBC provided a US$100 million green loan to Manulife US REIT (MUST) for Peachtree (a building in Atlanta) in May 2020; and an unsecured sustainability-linked loan of US$250 million also to MUST along with DBS in March 2021. In July, MUST’s manager announced it had breached its financial covenant following a downward revaluation of its portfolio.
Wong points out that the loan-to-value (LTV) for OCBC’s developed market commercial real estate (CRE) is around 50-60%.
For CRE loans, two-thirds are in Singapore, Malaysia and Indonesia. The Greater China loans are mainly in Hong Kong with only around 0.4% of total loans in mainland China. The remaining third are to Australia, UK and US. “Loans to US are less than 1% of total loans and secured by class A office properties in good locations,” Wong says.
The majority of CRE loans are to network customers. “We have one idiosyncratic risk because there are multiple parties involved and out of prudence we set aside provision,” says Tan Teck Long, global head of wholesale banking at OCBC.
“In Hong Kong, we are actually quite selective, we bank with most of the top developers or real estate owners and again the LTV ratio is quite low. I wouldn't say that is pocket of weakness. If you look at the NPL number for Greater China, that hasn’t really risen,” Tan adds.
OCBC closed at $12.94 on Aug 4, down 0.77% for the day and up 5.72% year to date.
