• Stay NEUTRAL, new SGD13.90 TP from SGD13.10 (1% upside) and c.6% yield. OCBC Bank will announce its 1Q24 results on 10 May. While we expect 1Q24 PATMI to be seasonally higher QoQ, the YoY figure may be lower – partly due to a low cost of credit (CoC) of 12bps in 1Q23 (2024 guidance: 20-25bps). With market expectations shifting back to higher-for- longer interest rates, near-term concerns could swing back to asset quality from income pressures. OCBC could do well in such a scenario, given its strong asset quality and capitalisation, further supported by attractive yields.

• NII could be muted with loan growth still soft … We gather that the 1Q loan growth trend should be similar to recent quarters – muted overall with pockets of growth from corporate non-trade and mortgage segments offset by soft trade loans. Overall, 1Q loan growth is likely to be within the low- single digit growth guidance.

• … while NIM is likely to be squeezed. 1Q24 average NIM should be lower QoQ and YoY vs 4Q23 (2.29%) and 1Q23 (2.30%) as 2023 exit NIM was 2.26% and loan yields may have peaked. OCBC guided for 2024 NIM of 2.2- 2.25% based on the assumption of four rate cuts in 2H24 (2023: 2.28%). Market expectations on the timing and number of rate cuts this year have been pushed back and scaled down. The difference (between OCBC’s assumption and market expectations) should not be too material to NIM, as the additional rate cuts OCBC assumes would have occurred towards the back end of 2024, we believe.

• Better non-II QoQ expected from rebound in insurance income (4Q23 impacted by higher claims) and typically better wealth management activities QoQ. YoY, we think non-II could be flattish due to elevated levels for 1H23 trading income, specifically non-customer trading flows. We expect 1Q24 operating income to be flat YoY with asset growth offset by NIM squeeze and flattish non-II. QoQ, we see single-digit growth on better non-II.

• No red flags on asset quality. We think the 1Q24 bottomline trend will depend on opex control and CoC. The 6% YoY opex growth we factored in for FY24, together with a higher 1Q CoC (2024F: 24bps, in line with guidance), drive our expectations for PATMI to weaken YoY. That said, we understand that asset quality remains stable, and given its high loan loss coverage level of 151%, we would not be surprised if CoC lands at the lower end of the guided range. QoQ, we expect stable opex and lower CoC (4Q23 impacted by pre-emptive provisioning) to underpin PATMI growth. Better-than-expected opex control and milder-than-expected CoC are upside risks to our forecasts.

• No changes to earnings forecasts. However, we raise our TP after lowering our equity risk premium (ERP) assumption and ascribing a new 2% ESG premium (0% premium/discount previously) after updating our ESG scorecard following the release of OCBC’s Sustainability Report 2023.

Source: RHB Research - 17 Apr 2024