Helen Wong, group CEO of Oversea-Chinese Banking Corp (OCBC) O39 , sounded somewhat upbeat during its results briefing on May 10.
OCBC’s net profit in 1QFY2023 ended March 31 increased 44% q-o-q and 39% y-o-y to $1.88 billion. This came in above analysts’ expectations of $1.55 billion and the new quarterly high was largely driven by the rise in non-interest income and lower allowances.
In addition, contributions by subsidiary Great Eastern Holdings (GEH) are likely to be less volatile in the years ahead. Since 1QFY2023, GEH has implemented SFRS 17 although more details of how the new reporting method affected results will only be shared in 1HFY2023.
OCBC’s group CFO Goh Chin Yee says: “Insurance profit is expected to be less volatile due to the reclassification of insurance assets and liabilities to fair value through other comprehensive income (FVOCI)... This will remove a significant portion of previously observed volatilities from [mark-to-market] valuation of insurance, assets and liabilities.”
Also, the classification of GEH’s operating expenses relating to agency and sales commission as well as claims were reclassified to net off insurance revenue. “So, it disappeared from the operating expense line and moved up to the net of insurance revenue. That’s one of the effects of SFRS 17,” Goh adds.
As for net interest income, the US Federal Reserve’s 25 bps hike in May before an anticipated pause, implies that the largest gains in net interest margins (NIM) and net interest income growth appear to be over for the local banks. As it is, OCBC’s net interest income fell 2% q-o-q but was up 56% y-o-y to $2.34 billion.
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NIM of 2.30% in the first quarter came in 1 basis point (bp) below 2.31% a quarter ago as a rise in asset yields was offset by higher funding costs and a lower loan-to-deposit ratio as the increase in deposits outpaced that of loans. However, among the three banks, OCBC’s NIM is the highest likely due to how it manages its assets and liabilities and asset mix.
This year, Wong is guiding for a NIM of 2.2%, credit costs of 15 bps to 20 bps, and low- to mid-single-digit loan growth. During OCBC’s FY2022 results briefing, she had guided for a NIM of 2.1% but this was upgraded to 2.2% on May 10.
In contrast, UOB U11 forecasts slightly lower NIM of 2.1% to 2.2% while DBS D05 guides for a full-year average of between 2.05% and 2.1%. DBS’s NIM rose 7 bps q-o-q to 2.12% in 1QFY2023 while UOB’s NIM fell 8 bps q-o-q to 2.14% over the same quarter.
See also: Deutsche Bank completes sale for US$1 bil US CRE loan portfolio
“We have a higher starting point. I wouldn’t say it’s optimism; it’s how we manage our balance sheet. To an extent, 2.3% in 1QFY2023 would not be a natural conclusion. Last year, we assumed the Fed would cut interest rates. We’re seeing that they won’t now,” says Wong.
Whatever the case, funding costs are rising for all three banks. OCBC’s customer deposits rose 5% both q-o-q and y-o-y to $367 billion. However, current account and savings account (Casa) deposits fell 21% y-o-y and 5% q-o-q, indicating a Casa migration to higher-cost fixed deposits. Goh also indicated that OCBC received new deposits.
No issues with real estate portfolio
When it comes to credit cost, OCBC is setting aside $54 million in general allowances, up significantly from a year ago but lower than 4QFY2022’s $213 million. “We are looking forward,” says Wong, “Earlier in 4QFY2022, we made some general provisions for real estate which we explained when we talked about 4QFY2022’s results.” In 4QFY2022, OCBC made a provision for Hong Kong commercial real estate for a specific customer where the loan-to-value was 60%.
Wong also revealed that commercial real estate (CRE) comprised 30% of OCBC’s loan book. CRE in developed markets, including the US, UK, Australia and Japan, accounted for about 10% of total loans. The exposure to developed markets is diversified across different asset classes, including retail, hospitality, logistics warehouses, data centres and offices.
“Given broader concerns about the CRE sector in developed markets such as the US, I would like to share more information on our loan portfolio. CRE loans are provided mostly to network customers in our key markets with proven track records and financial strength. Our overall LTVs are low and are mostly secure,” says Goh. “We do have commercial real estate exposure in the developed markets, mainly in the UK, US and Australia,” she adds, adding that this portfolio is well stress-tested.
Analysts and market watchers in general are concerned about banks and their relationship with CRE loans since a couple of S-REITs with US office assets are facing some stress, as are a couple of Chinese S-REITs and an Indonesian S-REIT.
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A JP Morgan report in April said that small banks hold 4.4x more exposure to US CRE loans than big banks. On average, CRE loans comprise 28.7% of the assets of small banks. However, it is the office sector that faces the most headwinds. Many other sectors within CRE have stronger fundamentals, says JP Morgan.
Fortunately, OCBC’s loan book has been largely repriced. “We do not have the potential to reprice the loan book [much further],” Wong says.
The loan portfolio is repriced every three months, according to Collins Chin, head of investor relations. The bulk of the loan portfolio, roughly 90%, is on floating rates, notes Chin. With a shift to Sora (Singapore overnight rate average), there will be perhaps a shortening in the repricing, Goh adds.
Sectoral pathways to come
OCBC has committed $47 billion towards its sustainable finance portfolio, just shy of the bank’s target to grow this to $50 billion by 2025. Despite this, Wong revealed that OCBC will not be increasing this target soon. “I’m not adjusting this, because it is still another two-plus years to 2025. But again, that doesn’t stop our focus on helping our customers to transition to net zero.”
OCBC set the $50 billion target in 2021 after surpassing its original targets of $10 billion by 2022 and $25 billion by 2025 ahead of time. The latest figure is up another $3 billion from the $44 billion reported at the end of 2022, which, in turn, was up 29.4% from the $34 billion reported a year earlier.
“I’m not changing that target yet because, through several years, we now know exactly how to make the best of it, in helping our clients combat climate change,” says Wong. “I don’t see this as a crucial stage to tell everybody [that] because we are [at] $47 billion, I will reset it. This will become very business-as-usual to us; we will continue to grow our sustainable financing. If we continue to grow double-digits every year, whatever target you set becomes just a number to be beaten.”
In October 2022, OCBC became a signatory to the Net-Zero Banking Alliance (NZBA), a United Nations-convened, industry-led initiative that supports the implementation of decarbonisation strategies.
Fellow signatories DBS and UOB have already released their sector-specific transition strategies; OCBC is set to do so before the end of 1H2023.
Expect higher dividends
OCBC’s shareholders should be able to look forward to a higher absolute dividend. Wong and the management team have raised the dividend payout ratio to 50%, against the backdrop of ample capital and higher earnings. OCBC’s common equity tier 1 (CET1) ratio as at 1QFY2023 is at 15.9% before its FY2022 final dividend payout and will fall to 15.1% after the payout.
This is higher than its peers; DBS reported a CET1 ratio of 14.4%, down from 14.6% in the previous quarter, while UOB’s CET1 rebounded to 14% from 13.3% in 4QFY2022.
But how high is too high? “We do think that we need to operate our capital effectively [and] efficiently, and we need to look after our shareholders as well,” says Wong. “That’s why we also committed to changing our dividend policy … In the past, we were around 40-something per cent [payout ratio]. So, that is already a move to make sure that we also look after our shareholders by distributing more from our capital.”
Last year, OCBC announced an interim dividend of 28 cents per share for 1HFY2022, totalling approximately 44% of the group’s net profit after tax. Six months later, OCBC’s final dividend of 40 cents per share brought FY2022 total dividend to 68 cents, representing a payout ratio of 53% against net profit, up from 49% the year prior.
As at March 31, OCBC’s CET1 capital of $36.9 billion is up 4.8% q-o-q and 5% y-o-y. “In a market of uncertainty, you would generally want to hold on to a bit more [capital],” adds Wong. “Hopefully, in the short to medium term, we will effectively use the capital to bring down the CET1 ratio to about 14%.”
If the 1QFY2023’s earnings trend is anything to go by, FY2023 net profit is set to beat FY2022’s net profit handsomely.
“We will continue to closely monitor the market volatilities and tightening financial conditions around the world. We are well-positioned. And indeed, as I said earlier, there could be more opportunities for us if the political tension continues, and customers like MNCs pursue their ‘China plus one’ strategy,” Wong says.
