• OCBC's share price is almost unchanged year-to-date, retreating from the 18% year-to-date gain in mid-Feb 2022. While recessionary fears may persist in the near term, OCBC's decent dividend yield should provide share price support while the current P/BV of 0.9x (or -1 standard deviation from its historical mean) is undemanding.
• Stay BUY and S$13.90 target price, 21% upside and ~5% yield.

NIM Uplift Increasingly Meaningful

• With the US Federal Funds Rate (FFR) rising faster than earlier anticipated, OCBC (SGX:O39) expects to see meaningful uplift in NIM in 2022. NIM, having ticked up 3bps q-o-q in 1Q22, should see progressive expansion in the quarters ahead as Singapore banks have started to raise lending rates following the FFR hikes in March (+25bps) and June (+75bps). This is most evident in the rise in mortgage rates – OCBC’s 2-year fixed-rate mortgage has risen to 2.65% from 1.3% in Dec 2021.
• With the dot plot pointing to a projection of 3.4% (+215bps) by end-2022 and 3.8% (+40bps) by 2023, loan yields should continue to improve through to 2023. This suggests upside to management’s NIM guidance of 1.55-1.58% for FY22 (1Q22: 1.55%). A 25bps rate hike over a 12-month period would boost OCBC’s NIM by 4-4.5bps and net profit by 3%.

CASA Base to Keep Funding Cost Manageable

• On the liability side, OCBC's management expects the rise in funding costs to be manageable. With the banking system flushed with liquidity, there are little concerns over deposit competition. There has been some shift to fixed deposits and the Singapore Savings Bonds (SSBs) with the interest rate uptrend.
• More importantly, OCBC has sizeable CASA deposits of ~60% of customer deposits.

Businesses Getting Nervous

• While rising rates are positive for NIMs, it would inevitably have some dampening effect on demand for credit. Fallout from the Russia-Ukraine war, China’s COVID-19 measures, and tighter global financial conditions are also fanning fears of a global recession. These are weighing on sentiment, causing OCBC’s customers to put off huge projects and investments.
• New mortgage sales have also been impacted by the Dec 2021 property cooling measures, although the pipeline remains supported by previous sales. We believe 1H22 loans growth would continue to trail behind FY22 target of mid-to-high single-digit growth (1Q22: +5.6% annualised).

Non-II to be Flattish

• OCBC’s non-interest income (non-II), which fell 23% y-o-y in 1Q22, would likely be flattish at S$1.0-1.1bn in 2Q22. Fees from wealth management is expected to see little change from 1Q22’s S$256m as volatility in the financial markets keeps clients sidelined. Fees from loans, trade and remittances would be subdued on softer loan demand and trade flows.
• That said, its S$251bn AUM would provide steady income from fund management, credit cards fees should recover on higher consumption spending and travel, while its insurance business remains resilient.

Watchful on Asset Quality

• OCBC's management is very comfortable with asset quality with no particular weakness detected from internal stress tests.
• While we believe 2Q22 credit cost would remain low (1Q22: 6bps), management remains conservative, keeping credit cost guidance at 20-25bps for FY22.
• Our S$13.90 target price for OCBC includes a 2% ESG premium given our ESG score of 3.1.

Source: RHB Invest Research - 12 Jul 2022