• OCBC (SGX:O39)’s 9M22 earnings were in line with Street expectations. Robust NIM expansion, benign credit cost on improving asset quality and tightly controlled cost growth were key standouts in 3Q22.
• Earnings upgrade for refreshed guidance for NIM and credit costs have resulted in valuation falling to attractive levels – 0.9x FY23F P/BV against ROE of 12.6%. Maintain BUY on OCBC, with new S$15.00 target price from S$13.90 target price, 25% upside and ~6% FY23F yield.

9M22 in Line Consensus Expectations

• OCBC's net profit of S$4.44bn in 9M22 (+14% y-o-y) was at 80% and 76% of our and Street FY22F earnings. Reported ROAE improved to 11.5% (FY21: 9.6%). CET-1 slipped but remained robust at 14.4% (2Q22: 14.9%).
• In 3Q22, PIOP rose 16% q-o-q as NII surged 23% q-o-q to offset the 11% q-o-q fall in non-II while opex was up a modest 1% q-o-q. CIR eased to 40.3% vs 43.5% in 2Q22. Bottomline growth was moderated by the 82% q-o-q increase in impairment charges, with loan credit cost at 14bps (2Q22: 8bps).

Mid-single Digit Loan Growth Within Reach

• OCBC added 2% q-o-q to its loan book, bringing year-to-date growth to 4.6% or an annualised 6.1%. Management expects credit demand, which gained momentum in 3Q22, to be sustained in 4Q22.
• We believe OCBC would end 2022 with a 6% y-o-y growth in loans, within management’s target of a mid-single digit increase.

Guiding for 2.1% NIM in 4Q22

• NIM expanded by a robust 35bps q-o-q to 2.06% in 3Q22 (2Q22: +26bps q-o-q) – the second consecutive quarter of better-than-peer margin improvement. Management attributed the NIM uplift to improved margins across OCBC’s key markets as the increase in asset yields outpaced the rise in funding costs.
• OCBC's management expects to maintain NIM at 2.15% in 4Q22, the exit level in Sep 2022. This would result in an average NIM of 1.9% for FY22F.
• We see an upside risk to management guidance as we believe NIM would likely edge higher, although at a more moderate rate as funding costs trend higher.

Credit Cost Guidance Lowered

• Non-performing assets (NPA) fell 7% q-o-q on recoveries and upgrade of accounts in Malaysia and Indonesia. This was partly offset by the 18% q-o-q rise in Greater China NPLs on the impairment of a network customer that is fully collateralised.
• The healthy asset quality allowed management to revise credit cost guidance to a low to mid-teens, from 20-25bps.

OCBC – Earnings Forecast and Target Price

• Our FY22F-24F earnings forecast for OCBC are lifted by 9-10% as we pencil in a higher NIM and lower credit cost. These were moderated by assumptions of a lower non-II.
• Our target price for OCBC rises to S$15.00, and is based on the GGM-derived intrinsic value of S$14.71 and a 2% ESG premium, based on our in-house ESG methodology.

Source: RHB Invest Research - 7 Nov 2022