Oversea-Chinese Banking Corporation’s (OCBC) asset quality may worsen slightly in 2024 amid prolonged high interest rates and global uncertainties, says Bloomberg Intelligence analyst Rena Kwok.
In 1QFY2024, OCBC's new non-performing assets (NPA) formation of $239 million outpaced its 2023 average of $140 million, due to a few corporate accounts in the real estate and services sectors in Southeast Asia.
This trend is similar to peer DBS Group Holdings but lags United Overseas Bank U11 (UOB), whose new NPA in 1QFY2024 was below its 2023 mean.
“OCBC stays well-placed to weather manageable increases in credit losses, due to high provisions,” says Kwok in a May 10 note.
Peer-leading capital
OCBC's capital position leads its peers, even after factoring in the impact of final Basel III reforms. Its solid funding profile is a key credit strength, says Kwok. .
See also: https://www.theedgesingapore.com/capital/results/ocbc-1qfy2024-net-profit-22-q-o-q-5-y-o-y-198-bil
Its asset quality could normalise at slightly higher levels in 2024 amid macroeconomic risks, she adds.
Systemic stresses are limited, but pockets of stress may emerge from small- and medium-sized enterprises (SMEs) and lingering commercial real estate (CRE) risks in some overseas markets, according to Kwok.
High stress in OCBC's greater China business looks unlikely, says Kwok, despite the bank's weak risk-return underwriting in the region and the mainland's uneven economic recovery. “The region stays critical for OCBC's medium-term growth, but the bank may adopt a targeted strategy in 2024. Robust asset quality may normalise at slightly higher levels this year amid economic risks.”
See also: OCBC makes privatisation bid for Great Eastern with $25.60 offer price
Real estate risks manageable for OCBC, UOB
Losses in OCBC's and UOB's loans to the CRE sector seem contained despite near-term elevated interest rates and growth headwinds. Based on a foundation internal ratings based approach (FIRB) in line with Basel rules, the average probability of default for OCBC's and UOB's income-producing real estate (IPRE) loans has risen only modestly since 2020.
This reflects the banks' tight risk controls — where the bulk of their CRE loans are in Singapore with resilient fundamentals — and average LTV ratio at 50%-60% for their overall CRE exposures, according to Kwok.
For the lenders, US CRE loans are mainly secured by Grade A office properties, largely to network customers and strong sponsors.
Compared with 4QFY2023, the probability of default of UOB's IPRE exposure rose to 2.20% and the probability of default of OCBC’s IPRE exposures fell to 1.96%.
Cautious stance
According to Kwok, Singapore's banks might adopt a targeted growth strategy for the greater China region this year. They might do this by focusing on opportunities in transaction banking, wealth management and helping onshore companies to diversify into new growth markets in Southeast Asia, while being cautious about onshore lending because of China's near-term economic struggles, she adds.
The lenders have broadly slowed the pace of growing their credit exposure and loan book in the country in anticipation of the slowdown, she adds.
Transaction banking might be a focal area for the banks to boost their revenue outlook as it helps to attract sticky deposits and generate fee income, as eventual rate cuts might rein in interest income this year, according to Kwok.
