• Stay NEUTRAL, new SGD13.10 TP from SGD13.40, 2% downside. 4Q23 results were in line. Relative to OCBC Bank’s FY23 guidance, its reported ROE of 13.7% missed the >14% target. For FY24, mild NIM compression and higher credit cost were guided, leading to an ROE target of 13-14%. The stock has done relatively well YTD. Yet, despite healthy capital and asset quality, investors may be disappointed that it is not “doing more” with respect to capital returns. As such, we switch our preferred sector pick over to DBS (DBS SP, BUY, TP: SGD36.10) from OCBC.

• 4Q23 results were in line, with reported net profit of SGD1.6bn (-10% QoQ, +12% YoY) bringing FY23 earnings to SGD7bn (+27% YoY) – 99% of our and Street’s FY23 estimate. FY23 reported ROE was 13.7% (FY22: 11.1%) while CET-1 was up 110bps QoQ to 15.9% (4Q22: 15.5%). A final DPS of 42 SGD cents was declared (4Q22: 40 SGD cents) – ahead of our 38 SGD cents expectations. This brought 2023 DPS to 82 SGD cents vs 2022’s 68 SGD cents and translates to a payout of 53% (FY22: 54%)

• Results highlights. Main drags this quarter were: i) Weaker non-II (insurance was impacted by higher claims; otherwise, fee and trading income held up well QoQ) and ii) uptick in loan credit cost to 21bps (3Q23: 17bps), albeit predominantly related to general allowances as OCBC continues to build up buffers for the real estate space and in general. Flipside: i) NIM was surprisingly up 2bps QoQ (-2bps YoY), aided by the release in some fixed deposits (-7% QoQ) given its liquid balance sheet (LDR: 81% vs 3Q23: 79.7%); ii) good CASA momentum (+4% QoQ), which helped lift the CASA ratio to 48.7% from 46.3% in 3Q23 (4Q2: 51.8%); iii) sound asset quality with NPLs falling 6% QoQ, bringing the GNPL ratio to 1% (stable QoQ) while LLC rose further to 151% (3Q23: 139%); and iv) a 2% drop in opex.

• 2024 outlook and other highlights: OCBC guided for FY24 ROE of 13-14%. This takes into account some NIM compression (NIM guidance of 2.2-2.25% vs FY23’s 2.28%) and higher credit cost of 20-25bps (2023: 20bps), although management does not see any portfolio stress or systemic issues for now. OCBC’s NIM guidance assumes four rate cuts, which is expected to kick-in in 2H24. Finally, despite its healthy asset quality and capital levels, OCBC kept to its 50% dividend payout guidance, citing the need to maintain some capital buffer to face potential uncertainties and for growth. While the bank is looking at potentially improving the capital structures at its subsidiaries, management could not share more at this juncture.

• Forecasts and TP. We lower our FY24F-25F PATMI by 2-4%, mainly after bringing our loan credit cost assumptions in line with guidance. This is cushioned by an upward revision to NII post the better-than-expected full- year NIM. The change to our TP is minor. There is no ESG premium/discount ascribed as OCBC’s overall ESG score is in line with the 3.1 country median.

Source: RHB Research - 28 Feb 2024