Oversea-Chinese Banking Corporation’s (OCBC) stable non-performing loan (NPL) ratio for 2QFY2024 ended June, down 0.1 percentage point q-o-q to 0.9%, likely “eased some concerns” over Singapore banks’ exposure in Hong Kong commercial real estate (CRE), says Citi Research analyst Tan Yong Hong.
Compared to the two other major Singapore banks, OCBC’s exposure in Hong Kong office CRE is the highest, at 2% of its total loan book compared to DBS’s 0.6% and United Overseas Bank U11 ’s (UOB) 1.3%. DBS will report its 1HFY2024 results on Aug 7.
But OCBC’s NPL coverage ratio is the highest among its peers, at 142%, notes Tan. OCBC’s NPL ratio across geographies is “broadly stable h-o-h”, says Tan, down 0.2 ppts.
OCBC’s management reduced its Hong Kong CRE exposure to 2.0%, and asset revaluation is performed “at least annually” with loan-to-value below 50%, according to management. Speaking at the release of its results on Aug 2, management says exposure in Hong Kong is mainly to blue-chip listed companies and network customers.
Management had earlier paused financing to US CRE amid concerns over falling valuation.
Outside of office CRE, management is comfortable with Hong Kong real estate exposure in other asset classes, such as retail and student accommodation.
See also: OCBC posts record 1HFY2024 net profit of $3.93 bil, up 9% y-o-y; 2QFY2024 net profit falls 2% q-o-q
In an Aug 2 note, Tan stays “neutral” on OCBC with a target price of $14, below its $14.82 close price on Aug 1.
NIM compression
OCBC reported record net profit of $3.93 billion for 1HFY2024 ended June 30, 9% higher y-o-y from last year’s record figure.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
OCBC posted broad-based income growth that surpassed $7 billion for the first time, up 7% y-o-y, lifted by 3% higher net interest income of $4.87 billion and 15% higher non-interest income of $2.39 billion.
Average assets grew 5%, which the bank says was largely driven by an increase in high quality assets that were income-accretive, but this was lower yielding as compared to customer loans. This largely contributed to the moderation in 1HFY2024 net interest margin (NIM) by 5 basis points (bps) y-o-y to 2.23%.
OCBC’s 2QFY2024 NIM was 7 bps lower q-o-q, at 2.20%. OCBC tapped on wholesale funding to offset net cash outflows due to higher outflows from maturing wholesale funding and consolidation of positions from OCBC Credit, its non-bank subsidiary. These were higher cost deposits, which raised the cost of funds, notes Tan.
Management is positioning in duration bonds in anticipation of rate cuts, which are lower yielding than loans. OCBC’s house view is for two rate cuts in the remainder of this year. There was increasing exposure to fixed-rate loans and cash flow hedges to reduce balance sheet sensitivity to rates movement.
OCBC group CEO Helen Wong has downgraded her FY2024 NIM to the lower end of 2.20% to 2.25% range. NIM sensitivity is now at $4 million for every bps of US rate cuts, down from $5 million to $6 million, implying a 2.2 bps impact, notes Tan.
Non-interest income (non-II) fell despite assets under management (AUM) growth due to changes in clients’ activities, says Tan.
Net new money of $6 billion was helped by new relationship managers. Despite AUM growth of 2% q-o-q, fees were down 7% as clients switched into bonds.
OCBC’s 1HFY2024 dividend per share of 44 cents was ahead of forecasts due to the earnings beat. The bank has kept to its 50% payout ratio.
As at 4.10pm, shares in OCBC are trading 1 cent lower, or 0.07% down, at $14.81.
