• OCBC’s 1H22 results were broadly in line.
• More positive guidance on NIM and credit costs were tempered by our expectation of weaker non-II, resulting in modest earnings upgrade. Still, we like that asset quality remains resilient, while exposure to China’s troubled real estate sector is small, with no stress detected.
• OCBC's valuation is compelling, with P/BV of < 1.0x vs improving ROEs of 10-12%. Stay BUY and S$13.90 target price, 16% upside and ~5% yield.

OCBC's 1H22 Results Within Expectations

• OCBC Bank (SGX:O39)'s 1H22 net profit of S$2.84bn (+7% y-o-y) was at 53% and 52% of our and Street FY22F earnings. Reported ROE rose to 11% (FY21: 9.6%). CET-1 stayed healthy, although lower at 14.9% (1Q22: 15.2%).
• A cash dividend of S$0.28 was declared (1H21: S$0.25), representing a 44% payout.
• In 2Q22, PIOP rose 13% q-o-q, boosted mainly by the 13% q-o-q jump in NII and moderate 4% q-o-q rise in opex that lowered CIR to 43.5% (1Q22: 45.6%). Bottomline growth was moderated by the 64% q-o-q increase in loan provisions, with loan credit cost at 8bps (1Q22: 6bps).

FY22 Loan Growth Target Tempered

• OCBC's management remains positive on FY22 outlook. Still, cognisant that headwinds from the Russia-Ukraine war, supply chain disruptions and recessionary risk have dented investor sentiment, loan growth guidance is tweaked to mid-single digit (from high-to-mid single digit). In our view, this is achievable given year-to-date-June growth of 3% or 6% annualised.

Sustained NIM in 2H22

• NIM expanded 26bps q-o-q in 2Q22, a positive surprise with faster transmission of rising interest rates to improved asset yields.
• Notwithstanding the sharp increases in interest rates since mid-June, management expects NIM to stay at 2Q22 level of 1.81%. The guidance is conservative as management expects a further shift in CASA deposits to fixed deposits, while competition for fixed deposits would also push funding costs higher.

No Asset Quality Stress

• Non-performing assets (NPA) fell 8% q-o-q, helped by recoveries (namely oil & gas NPLs) and an upgrade of accounts in Malaysia and Indonesia where borrowers exited relief assistance. This lowered NPL ratio to 1.3% (1Q22: 1.4%), while NPA coverage is a higher 99% (1Q22: 91%).
• OCBC has ~S$2.0bn exposure to China’s real estate sector. With most borrowers being network clients, and exposure to uncompleted projects small, management does not see any structural concerns.
• Credit cost guidance remains conservative (lower end of 20- 25bps) as external headwinds may mean normalised provisions, and the need for additional overlays in 2H22.

OCBC - Earnings Forecast and Target Price

• Our FY22F-24F earnings forecast for OCBC are raised by 3-4%. Assumptions of better NIM and lower credit cost are partly offset by downward revision in non-II. We have also raised dividend estimates, taking into account the higher payout ratio in 1H22.
• Our unchanged S$13.90 target price for OCBC is based on an GGM-derived intrinsic value of S$13.61 and a 2% ESG premium, based on our in-house methodology.

Source: RHB Invest Research - 4 Aug 2022