After multiple quarters of record earnings, Oversea-Chinese Banking Corporation’s (OCBC) group CEO Helen Wong is turning cautious with her outlook.
After all, the bank’s house view is for two rate cuts by the US Federal Reserve this year and “possibly four to five next year”, says Kenneth Lai, OCBC’s head of global markets. This could impact net interest margin (NIM).
OCBC posted a record net profit of $3.93 billion for 1HFY2024 ended June 30, 9% higher y-o-y than last year’s record figure.
However, an increase in “high-quality”, “income-accretive” assets, which were lower-yielding than customer loans, weighed on NIM, which fell 5 basis points (bps) y-o-y to 2.23% in 1HFY2024. In 2QFY2024, NIM fell 7bps to 2.20%.
OCBC is increasing exposure to fixed-rate loans and cash flow hedges to reduce balance sheet sensitivity to rate movement. Speaking on Aug 2 at the release of the bank’s results for 1HFY2024 ended June 30, Wong says: “We haven’t seen high interest rates for so long, but, of course, one day it will come down. So, there are a lot of things we’re looking at in order to protect our NIM, but also to protect NII [net interest income].”
Wong also turned conservative on her NIM forecast for the year. While she maintains her previous guidance that FY2024 NIM should be “in the range of 2.20% to 2.25%”, Wong now says the actual figure “could be at the lower end of our range”.
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Weak US employment data released later that day perhaps underscored Wong’s outlook. Among research houses here, Citi Research analyst Tan Yong Hong took the first step by downgrading all three major Singapore banks to “sell”, even before DBS Group Holdings reported its 1HFY2024 results on Aug 7.
OCBC’s new target price is $13 from $14 previously, below OCBC’s Aug 2 close of $14.80.
In an Aug 5 note, Tan says Citi’s US economists expect 225bps in rate cuts over 10 months, starting with a 50bps cut in September. This should deliver 10bps NIM compression each in 2025 and 2026, says Tan. In 2QFY2024, OCBC’s NII rose 2% y-o-y to $2.43 billion.
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OCBC’s move to defend NII ahead includes increasing its fixed-rate asset mix and introducing more hedges. Its efforts have lowered sensitivity to rates to $4 million per basis point, down from $5 million–$6 million in 1QFY2024 and $6 million–$7 million in 4QFY2023.
This means a one-percentage-point (1 ppt) decline in interest rates would have a $400 million impact on NII over 12 months, which could be offset by securities trading, fee income and wealth management fees, or higher loan growth.
During the briefing, Wong herself noted “a lot of interest in NIM” from analysts and media. There are many moving parts in managing NIM, she replies, such as putting in place cash flow hedges, growing fixed-rate mortgages and offering fixed deposits with appropriate durations. “If you stay very high in NIM, but your NII drops because your volume drops, then it doesn’t really have the results.”
Hong Kong CRE exposure
OCBC’s commercial real estate (CRE) portfolio in Hong Kong came into focus given the prolonged market downturn there.
As at June 30, CRE from the office sector represents 11% of group loans, and management says this is “largely secured” with average loan-to-value (LTV) at 50%–60%. Two-thirds of these office CRE loans are in Singapore, Malaysia, Indonesia and Greater China, with the rest “largely in developed markets”.
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Tan Teck Long, OCBC’s head of global wholesale banking, says the bank is being “conservative” and has been selective in refinancing its customers. He adds that the bank updates the valuations of its CRE portfolio at least once a year or if it exhibits signs of stress.
Some CRE exposures invariably require restructuring, but OCBC does not deem this systemic.
To bolster his point, Tan says OCBC had stopped financing US CRE “ahead of the curve”. Now, the cycle is changing in Hong Kong, he adds, with vacancy rates rising.
That said, Hong Kong CRE exposure makes up less than 2% of total loans, with LTV below 50% and to large network customers.
OCBC also has residential loans in Hong Kong, which Tan says is “quite okay at the moment”.
OCBC’s non-performing loan (NPL) coverage ratio is the highest among its peers, at 142%. “We’re not trying to paint a rosy picture here,” says Wong. “CRE is a concern; developed markets are a concern. I think the whole market knows it, we see that. What we’re saying is when we look into our books and all the years [of] how we’ve managed risk, we’re not sitting here saying that we rely on borrowers giving us valuations. Of course, we have our sources.”
With a target for low single-digit loan growth this year, Wong says she is open to “more diversification” and rotating out of stressed sectors. “There are certainly some customers we don’t want to refinance when the transactions come due. We will make sure that the structure offers more protection. Even for our big customers, [we] can also diversify a bit further … We’ll look at, for example, student accommodation. This is something that is a lot more resilient, especially in the very popular centres where a lot of foreign students still continue to go to universities in those locations. So, [we’ll] just keep that broad base.”
Taking GEH private
OCBC announced at the release of its 1QFY2024 results its voluntary unconditional general offer for the separately-listed Great Eastern Holdings G07 (GEH), with an offer price of $25.60 per share.
At the close of the offer on July 12, OCBC increased its stake by 4.88 ppt to 93.32%. As the free float of GEH has fallen below 10%, the insurer remains listed but trading has been suspended.
As at July 31, over 130 shareholders holding more than 600,000 shares have accepted the offer and OCBC’s current stake “should be a bit more” than the 93.32% recorded at the July 12 close, says Wong.
The bank is now in a three-month evaluation period, says Wong. Owning “as much of the shares of GEH as possible” will allow OCBC to explore “stronger synergies”, she adds.
One analyst asked what exactly those synergies were. According to Wong, wholly owning GEH “makes a lot of disclosure [and] sharing of information even easier, if you know what I mean”.
However, should GEH remain a separate listed entity, listing and disclosure requirements would also need to be considered, in addition to customer data protection requirements, she adds.
Of course, there is greater income to be realised too. 1HFY2024 insurance income of $583 million was 17% higher y-o-y, largely attributed to stronger performance from the underlying insurance business. Total weighted new sales grew 34% to $973 million, underpinned by sustained sales momentum mainly from Singapore and Malaysia. New business embedded value grew 16% y-o-y to $339 million in the six-month period.
Analysts warn of rate cuts
While none of the analysts have turned as bearish as Citi’s Tan, RHB Bank Singapore and Maybank Research have maintained “neutral” and “hold”, with target prices of $15.70 and $15.32 respectively.
In an Aug 2 note, Maybank’s Thilan Wickramasinghe praised OCBC’s “high dividend visibility”; the bank declared a 1HFY2024 dividend per share of 44 cents and kept to its 50% payout ratio target. “Common equity tier-1 (CET-1) remains strong at 15.5%. Plus, we think there is potential for excess capital from Great Eastern to be returned if 100% ownership is successful. These bolster OCBC’s dividend visibility.”
Meanwhile, OCBC’s non-interest income continues to climb, says PhillipCapital Research’s Glenn Thum.
The growth was broad-based from fee income, trading income and insurance income, he adds, keeping his “accumulate” call and $15.40 price target. “Fee income was up 8% y-o-y mainly due to growth in wealth management fees (up 17% y-o-y) supported by strong traction across all wealth channels from an increase in customer activity.”
Likewise, Andrea Choong and Lim Siew Khee of CGS International Research expect a progressive recovery in OCBC’s wealth management fees as interest rates retreat, keeping “add” with an unchanged $16.70 price target.
OCBC’s wealth management income, comprising income from insurance, private banking, premier private client, premier banking, asset management and stockbroking, rose 14% to a record $2.54 billion in 1HFY2024. Group wealth management income accounted for 35% of total income, up from 33% a year ago. OCBC’s wealth management assets under management reached a new high of $279 billion, up from $274 billion in the previous year.
UBS analysts Aakash Rawat and Benjamin Tan say OCBC’s NIM and fee trends are weaker than those of United Overseas Bank U11 , their top pick. Rawat and Tan maintain “neutral” on OCBC and have a $15.70 price target.
Finally, Morningstar’s Lorraine Tan has the highest fair value on OCBC, maintained at $17 in an Aug 2 note, in which she says: “It was reassuring to see the ratio of non-performing assets remaining stable across geographies, including in Hong Kong where increases in non-performing assets were reported recently by some peer banks.”
Charts: OCBC
