• Stay BUY and SGD15.00 TP, 19% upside and c.5% yield. OCBC Bank is scheduled to release its 4Q22 results on 24 Feb. We expect the bank to report a net profit of SGD1.55bn for the quarter, down an estimated 3.5% QoQ due mainly to weaker non-II. Key positives would be the continued NIM expansion and benign credit cost on solid asset quality. Our TP is based on GGM- derived intrinsic value of SGD14.71, with a 2% ESG premium applied.

• NII and NIM to still show improvement. NII, which increased a sharp 23% QoQ in 3Q22, is expected rise further in 4Q22. Underpinning the NII improvement would be NIM expansion. Although unlikely to match the 35bps QoQ expansion to 2.06% in 3Q22, we believe NIM would still edge up 9bps QoQ to 2.15% in 4Q22 even as loans are being repriced to reflect the uptrend in interest rates. In 4Q22, Singapore’s short term rates are up 100-120bps QoQ.

• Within striking distance of loan growth guidance. Singapore banking system loans contracted by 4.3% between end-Sep and end-Nov 2022. Management attributes this to businesses deferring investment plans on uncertainty over 2023’s outlook. Despite the slippage, we gathered that OCBC would be able to meet management’s guidance for mid-single digit loan growth in FY22, in constant currency terms. Reported loan growth would, however, be a slight miss due to the strengthening of the SGD in 4Q22 (up 5.4% QoQ). OCBC’s loans grew 4.6% YTD-Sep 2022, or an annualised 6.1%.

• Non-II remains weak. OCBC’s wealth management income remained subdued in 4Q22. While the 4Q is usually a quiet period for the wealth industry, demand for wealth management products was also impacted by the risk-off sentiment among investors and the preference for cash. On a positive note, assets under management are still stable even as the bank continues to focus on driving growth in its wealth business. Similarly, contributions from Great Eastern Holdings (GE SP, NR) in 4Q22 may be negatively impacted by marked-to-market losses.

• Asset quality and credit cost. Management shared that much of the loans under relief assistance have expired, with remaining accounts under indulgence mainly in Indonesia. Repayment trends are good, reaffirming management’s believe that asset quality will be resilient notwithstanding softer GDP growth in 2023. With asset quality trends unchanged from those in 3Q22, we believe FY22 credit cost would be at the lower end of management’s 15-20bps guidance.

• While China’s reopening is widely expected to be positive for Singapore, management believes it is still early days to assess the potential impact on the domestic economy and OCBC.

Source: RHB Research - 20 Jan 2023