• Stay BUY and SGD13.90 TP, 16% upside and c.5% yield. OCBC Bank’s 1H22 results were broadly in line. More positive guidance on NIM and credit costs were tempered by our expectation of weaker non-II, resulting in modest earnings upgrade. Still, we like that asset quality remains resilient, while exposure to China’s troubled real estate sector is small, with no stress detected. Valuation is compelling, with P/BV of <1.0x vs improving ROEs of 10-12%.

• 1H22 within expectations. Net profit of SGD2.84bn (+7% YoY) was at 53% and 52% of our and Street FY22F earnings. Reported ROAE rose to 11% (FY21: 9.6%). CET-1 stayed healthy, although lower at 14.9% (1Q22: 15.2%). A cash DPS of 28 SG cents was declared (1H21: SGD0.25), representing a 44% payout. In 2Q22, PIOP rose 13% QoQ, boosted mainly by the 13% QoQ jump in NII and moderate 4% QoQ rise in opex that lowered CIR to 43.5% (1Q22: 45.6%). Bottomline growth was moderated by the 64% QoQ increase in loan provisions, with loan credit cost at 8bps (1Q22: 6bps).

• FY22 loan growth target tempered. Management remains positive on FY22 outlook. Still, cognisant that headwinds from the Russia-Ukraine war, supply chain disruptions and recessionary risk have dented investor sentiment, loan growth guidance is tweaked to mid-single digit (from high-to-mid single digit). In our view, this is achievable given YTD-June growth of 3% or 6% annualised.

• Sustained NIM in 2H22. NIM expanded 26bps QoQ in 2Q22, a positive surprise with faster transmission of rising interest rates to improved asset yields. Notwithstanding the sharp increases in interest rates since mid-June, management expects NIM to stay at 2Q22 level of 1.81%. The guidance is conservative as management expects a further shift in CASA deposits to fixed deposits, while competition for fixed deposits would also push funding costs higher.

• No asset quality stress. Non-performing assets (NPA) fell 8% QoQ, helped by recoveries (namely oil & gas NPLs) and an upgrade of accounts in Malaysia and Indonesia where borrowers exited relief assistance. This lowered NPL ratio to 1.3% (1Q22: 1.4%), while NPA coverage is a higher 99% (1Q22: 91%). OCBC has c.SGD2.0bn exposure to China’s real estate sector. With most borrowers being network clients, and exposure to uncompleted projects small, management does not see any structural concerns. Credit cost guidance remains conservative (lower end of 20- 25bps) as external headwinds may mean normalised provisions, and the need for additional overlays in 2H22.

• Earnings and TP. Our FY22F-24F earnings are raised by 3-4%. Assumptions of better NIM and lower credit cost are partly offset by downward revision in non-II (Figure 3). Our unchanged SGD13.90 TP is based on an GGM-derived intrinsic value of SGD13.61 and a 2% ESG premium, based on our in-house ESG methodology (Figure 4).

Source: RHB Research - 4 Aug 2022