• Maintain BUY and SGD13.90 TP, 20% upside and 5% yield. OCBC Bank’s share price is up a modest 2% YTD, giving up almost all of the 18% gain in early 2022. That said, we believe the stock will continue to outperform the broader market helped by healthy NIM expansion and its decent dividend yield. Our TP is based on a GGM-derived intrinsic value of SGD13.60 and a 2% ESG premium based on our in-house methodology.

• Loan demand subdued. Against the backdrop of global uncertainty stemming from intensifying inflation, policy tightening in many countries, geopolitical tensions, and supply chain frictions, businesses are taking a cautious stance on their investment plans. This continues to weigh on loan demand. Property cooling measures introduced in Dec 2021 and Oct 2022 will certainly lead to a slowdown in property sales. That said, OCBC has an inventory of SGD10.0bn in property loans to be disbursed over the next few years. We believe OCBC would report very modest QoQ rise in loans for 3Q22, mirroring the banking system trend. Recall that the group’s loans grew 2.8% YTD or an annualised 5.5% in 1H22.

• NIM expansion – the bright spot. NIM, having expanded 16bps QoQ to 1.71% in 2Q22 on the 112bps QoQ rise in domestic short term rates, will again be the key positive in the coming 3Q22 results. In tandem with the US Federal Reserve’s hefty 225bps (three hikes of 75bps each) increase in the federal funds rate to 3.25% between 15 Jun and 21 Sep, the 3-month Singapore Interbank Offered Rate (SIBOR) has risen 126bps QoQ to 3.17% on 30 Sep. We expect OCBC’s NIM expansion to be even wider in 3Q22. The sustained rise in interest rates will have a positive impact on NIM, which would in turn lift net interest income notwithstanding the weakness in loan demand.

• Corporate CASA to mitigate attrition. Based on data by the Monetary Authority of Singapore (MAS), system CASA ratio has eased to 58.7% from c.68% for 2021. While acknowledging that the switch to higher yielding assets is inevitable, OCBC believes that the attrition would be somewhat mitigated by the fact that 40% of its CASA comes from by corporate customers. Corporate CASA tends to be stickier as these are often working capital funds.

• Non-II still soft. The uncertain global outlook remained a drag on OCBC’s fees and commissions income in 3Q22. The bearish tilt in equity markets hurt demand for wealth products as customers remained risk-off. Overall, 3Q22 net fees and commissions are expected to remain at the SGD477m posted in 2Q22, which would mean a 16% YoY decline.

• Credit cost normalising. OCBC’s 3Q22 credit cost will normalise from the low 7bps in 1H22. Against guidance of 20-25bps for FY22, this would mean credit cost of c.33bps per quarter in 2H22. Still, asset quality is healthy and OCBC is not seeing stress in its loan portfolio. Management believes its residential mortgages would not be impacted by the rising interest rates. About 80% of its Singapore housing loans are owner-occupied purchases. Furthermore, group loan-to-value for housing loans is a low 50%.

Source: RHB Research - 19 Oct 2022