• Reiterate BUY, new SGD14 TP from SGD14.80, 14% upside with c.6% FY23F yield. OCBC Bank’s 1Q23 results are above expectations. Although loan growth guidance has been pared down – given the economic uncertainty – management was a bit more positive on NIM outlook. Upside risk to earnings would come from its wealth management business, which is seeing healthy net new money inflows, and a rebound in cross-border flows premised on China’s reopening. Its current valuation of 1.0x P/BV, against an ROE of 12.5%, is compelling.

• 1Q23 beat expectations. Net profit of SGD1.88bn in 1Q23 (+39% YoY; +44% QoQ) made up 27% and 28% of our and Street FY23F earnings. Reported ROE improved to 14.7% (4Q22: 10%). CET-1 was a solid 16.7% (15.1% after payment of FY22 final dividend). The positive variance was mainly due to the 257% QoQ jump in profit from its insurance and lower opex on the change in the classification of insurance claim expenses under Singapore Financial Reporting Standard (International) 17 (SFRS(I) 17). Against 4Q22, PIOP rose 23%, driven by 65% non-II growth and a 4% drop in opex. NII dipped 2% QoQ due to a shorter quarter. A 65% reduction in allowances led to the stronger bottomline growth.

• Loan growth guidance lowered. Reported loans were flat QoQ and YoY, but up 3% in constant currency (ccy) terms. Mortgages were up slightly, helped by a good pipeline built over the past year, but trade loans stayed weak as China had just reopened. Given the subdued economic outlook and new property cooling measures announced in late April, management revised its loan growth guidance to a low- to mid-single digit, from a mid-single digit.

• NIM to be slightly higher at 2.2%. In 1Q23, blended NIM was resilient at 2.30% (4Q22: 2.31%) even as higher asset yields was offset by the catch-up in funding cost. It also did not help that LDR was at a lower 79.2% (Dec 2022: 83.3%) as deposits grew at a faster pace of 5% QoQ. Although management sees limited room for loans to be repriced higher, a change in expectations on US rates has led to a revised NIM guidance of 2.2% (from 2.1%) for FY23F. OCBC had earlier expected interest rates to decline in the later part of 2023.

• Credit cost guidance unchanged. Non-performing assets (NPA) fell 5% QoQ on higher recoveries and upgrades, while new NPA formation stayed low. NPL ratio ticked down to 1.1% while NPA coverage rose 7-ppts to 121%. Loan credit cost was a lower 12bps vs 35bps in 4Q22 when OCBC took additional provisions for non-impaired assets. Although the bank is not seeing any sign of stress in its loan portfolio, its credit cost guidance remains at 15- 20bps. Management prefers to be prudent, as the rise in interest rates could impact certain borrowers’ ability to service their debts.

• We raise FY23-24F net profit by 2-3%, mainly on revisions to NIM and opex. Our TP falls to SGD14 (from SGD14.80) and with a 2% ESG premium applied, based on our in-house ESG methodology (Figure 4). With a greater focus on the E pillar due to climate change issues, we have tweaked our ESG weightage. For further details, see our research note titled Envisioning a Better Future.

Source: RHB Research - 11 May 2023