With more market observers betting that the US Federal Reserve is done raising rates, there is a growing view that banks will no longer enjoy the bumper interest income they have had since the rate hikes started.
Nonetheless, Helen Wong, group CEO of Oversea-Chinese Banking Corporation (OCBC) O39 , expects the bank’s current net interest margins (NIMs) to hold steady through 1HFY2024 ending June 2024. Speaking at the release of the bank’s 3QFY2023 results on Nov 10, Wong thinks NIMs will stay “at current levels for the first half, barring unforeseen circumstances”.
This is in contrast to her counterparts. During their respective 3QFY2023 briefings, DBS Group Holdings’ D05 group CEO Piyush Gupta said he thinks DBS’s NIM peaked in the quarter. United Overseas Bank U11 ’s (UOB) deputy chairman and group CEO Wee Ee Cheong expects FY2024 NIM to remain at its current levels, adding that UOB will manage its balance sheet to keep the figure stable.
OCBC would undoubtedly be happy if the bank’s current NIM could be maintained. The measure of net return on OCBC’s earning assets rose 21 basis points (bps) y-o-y to 2.27% in the most recent quarter. As a result, net interest income (NII) grew 17% y-o-y and 3% q-o-q to a record $2.46 billion, supported by 6% asset growth.
At 2.27%, OCBC’s NIM is 1 bp higher q-o-q, and FY2023 NIM is seen to be in the “2.25% region” from “above 2.2%”. Speaking at the same results briefing, CFO Goh Chin Yee says the bank is being prudent, as it expects funding costs to increase near the year-end. In comparison, DBS and UOB reported group NIMs of 2.19% and 2.09% for the quarter, up 3 bps and down 3 bps q-o-q, respectively.
Despite higher rates, OCBC was still able to grow its loan book in constant currency terms by 1% y-o-y and q-o-q to $298 billion in 3QFY2023. Geopolitical tensions will continue to weigh on the global markets and, in turn, loan growth, warns Wong. As a result, OCBC has lowered its 2023 loan growth estimate to “low single-digit” from “low- to mid-single-digit” in the previous quarter.
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From Wong’s point of view, geopolitical tension remains “very unhealthy” and has weighed down on macroeconomic conditions and, by extension, demand for loans. “Before this quarter, we were talking about one war. Now, we’re talking about two wars around the world,” says Wong. “So, we do see loan demand to be quite muted; trade loans are not doing very well because trade volume around the region has not rebounded as [much as] people have hoped for.”
Lower cost-to-income target
Meanwhile, OCBC says income growth outpaced the increase in operating expenses, which grew 5% y-o-y to $1.34 billion in 3QFY2023, owing to “continued investments in the group’s franchise across people and technology”, mainly from higher staff costs and IT-related expenditure.
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OCBC’s credit costs, or allowances for loans as a percentage of average loans, came in at an annualised 17 bps during the quarter, up 3 bps y-o-y but down 14 bps q-o-q. Total allowances grew 20% y-o-y to $184 million, which OCBC blamed on impaired assets that swelled from $52 million in 2QFY2023 to $220 million in the most recent quarter.
That said, 3QFY2023 allowances were 27% lower q-o-q, owing to a $36 million write-back in allowances for non-impaired assets compared to a $200 million charge in the previous quarter. The write-back included migration of allowances for non-impaired assets, which OCBC says was “prudently set aside in previous quarters”.
OCBC’s non-performing loan ratio improved to 1.0% from 1.2% last year, while non-performing assets (NPA) fell 6% q-o-q to $3.1 billion. Allowance coverage for total NPA rose 8 percentage points (ppts) q-o-q and 31 ppts y-o-y to 139%.
Fee income rebound
In 3QFY2023, OCBC posted a net profit of $1.81 billion, up 21% y-o-y and 6% q-o-q. Aside from NII, non-interest income grew 4% y-o-y but fell by 9% q-o-q to $0.97 billion. The y-o-y growth in non-interest income was supported by a rise in net fee income, up 2% y-o-y to $461 million, the highest in four quarters. That said, fee income has been on a decline since a pandemic-era peak of $585 million in 1QFY2021.
The higher fee income in 3QFY2023 was mainly due to higher wealth management (WM) fees from increased customer activities and higher credit card fees, says OCBC.
WM income for the most recent quarter rose 16% y-o-y to $1.12 billion, which made up 33% of the group’s income for the quarter. Assets under management, meanwhile, grew 8% y-o-y but fell 2% q-o-q to $270 billion at the end of September.
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WM fees, which have traditionally been the largest contributor to OCBC’s fee income, contributed more than half (54.8%) of 1QFY2021 net fee income at $321 million. According to Chin, WM fees have been on a downtrend as the outlook for clients is “still risk-off, given the current climate”. “So, clients are still predominantly holding the bulk of their assets in cash.”
WM fees have also traditionally dipped every fourth quarter. “Seasonally, not just for us, but across the industry as well, [the] fourth quarter does seem to be a bit more soft compared maybe to the rest of the year,” adds Chin. “Traditionally, it’s a period where clients go on holiday, so there may be fewer trades.”
Even with the rebound in WM fees, Wong says she “wouldn’t paint too rosy a picture”. “We need to see that momentum going; investors are still sitting a bit on the fence.” For now, she hopes to capture fees from transactions, particularly remittances and cross-border fund flows, but remains cautious about a lower level of trade activity within Asia. “If we see another uptick in the last quarter, I’ll be quite happy. Hopefully, the momentum will continue. But it is very difficult to project how much higher it will be.”
Dividends and ROE
After paying an interim dividend of 40 cents per share in 1HFY2023, OCBC’s common equity tier 1 (CET-1) ratio fell to 14.8%, down 0.6 ppts q-o-q, but higher than 14.4% in 3QFY2022. This is still above OCBC’s aim to bring CET-1 towards 14% in the short to medium term. Even with OCBC’s 50% dividend payout policy, some analysts are still hopeful of a special dividend at the end of FY2023, especially with excess CET-1.
The bank remains committed to the dividend policy, says Wong, but she cautions against correlating CET-1 with special payouts. “Whether there’s any upside, it all depends on how we look at our capital positioning for the next year.” For context, OCBC increased its FY2022 payout by 28% to 68 cents, equivalent to a payout ratio of 53%, compared to 49% in FY2021.
In any case, Wong says the bank is on track to deliver its target of $3 billion in incremental revenue by 2025, a goal the bank unveiled at its brand refresh in July.
Last quarter, management projected that a sixth of the $3 billion will be delivered this year, a third next year and the remaining half in 2025. OCBC “should be able to achieve” the 2023 target of $500 million in additional revenue by the end of this year, says Wong. As at September, OCBC is also “on target” to achieve its end-2023 return on equity (ROE) target of “above 14%”, she adds.
Latest acquisition
In a sign of how Singapore banks have always kept an eye beyond the city-state, OCBC on Nov 16 announced the IDR2.2 trillion ($191 million) acquisition of Commonwealth Bank of Australia’s (CBA) stake in its 99%-owned Indonesian subsidiary, PT Bank Commonwealth (PTBC).
As at Sept 30, PTBC’s net asset value (NAV) and net tangible asset (NTA) value was IDR4.1 trillion and IDR3.5 trillion respectively.
OCBC plans to acquire the remaining 1% from PTBC’s other shareholders and then fold PTBC into OCBC Indonesia, bringing together their complementary SME customer base and retail base respectively.
“The proposed acquisition is expected to create synergies and strengthen the franchise value of OCBC Indonesia,” says OCBC.
In response to a question on M&A — albeit in China, Wong says that the bank will look at opportunities, especially in the markets that would supplement its core business.
Analysts maintain estimates
Following the results, PhillipCapital’s Glenn Thum has kept his “buy” call and $14.96 target price, as he maintains his view that NII will grow in FY2024, driven by stable NIMs and rising loans. Fee income is seen to recover too. “OCBC is our preferred pick among the three banks due to attractive valuations and a dividend yield of 6.6%, buffered by a well-capitalised 14.8% CET-1 and fee income recovery from China’s reopening,” he says.
RHB Bank Singapore, which has a $13.70 price target, likes OCBC for its strong asset quality metrics, which is a “potential differentiating factor in a higher-for-longer interest rate environment”. A higher-for-longer rate may keep the bank’s NIM elevated, though this may come at the expense of loan growth and asset quality, says RHB, which rates OCBC its top local bank pick. “Hence, FY2024 credit cost should be higher versus FY2023 but not by a significant quantum.”
Citi Research analyst Tan Yong Hong has also kept his target price of $13. “[The] market [is] likely overly focused on exit NIM as OCBC had to replace additional tier 1 (AT1) they have redeemed with interest-bearing deposits. Taking a step back, AT1 is below CET-1 and coupon payments are paid out of capital.”
While DBS Group Research analyst Lim Rui Wen has kept her “hold” call like her peers, she is less upbeat on OCBC’s outlook. The analyst, who has a $13.70 target price on this counter, sees limited growth catalysts for now as the Fed’s rate cycle nears its peak. She also believes OCBC’s NIM peaked in 3QFY2023, with “limited headroom for loan repricing” in 4QFY2023. “We believe the bulk of the banks’ share price re-rating from higher interest rates is over.”
UBS analysts Aakash Rawat and Benjamin Tan are also “neutral” on OCBC with a target price of $12.97. They have, however, raised their FY2024 and FY2025 wealth management fee estimates by 6% to 20%, which represents 25%–32% y-o-y growth.
