• Maintain BUY, with new SGD15.00 TP from SGD13.90 TP, 25% upside and c.6% FY23F yield. OCBC Bank’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%.

• 9M22 in line consensus expectations. Net profit of SGD4.44bn in 9M22 (+14% YoY) 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% QoQ as NII surged 23% QoQ to offset the 11% QoQ fall in non-II while opex was up a modest 1% QoQ. CIR eased to 40.3% vs 43.5% in 2Q22. Bottomline growth was moderated by the 82% QoQ increase in impairment charges, with loan credit cost at 14bps (2Q22: 8bps).

• Mid-single digit loan growth within reach. OCBC added 2% QoQ to its loan book, bringing YTD 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% YoY 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 QoQ to 2.06% in 3Q22 (2Q22: +26bps QoQ) – 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. 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% QoQ on recoveries and upgrade of accounts in Malaysia and Indonesia. This was partly offset by the 18% QoQ 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.

• Earnings and TP. Our FY22F-24F earnings 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 (Figure 3). Our TP rises to SGD15.00, and is based on the GGM-derived intrinsic value of SGD14.71 and a 2% ESG premium, based on our in-house ESG methodology (Figure 4).

Source: RHB Research - 7 Nov 2022