• NEUTRAL, new SGD15.70 TP from SGD14.80, 6% upside. OCBC Bank’s 2Q24 results beat estimates, but the group retained its guidance as it looks ahead to the start of interest rate cuts and efforts to protect NII. We expect investors to look past the results beat. Solid asset quality and capital, coupled with 6% dividend yields should provide downside support, but a further share price outperformance is likely to be challenging in the absence of DPS growth and rising market expectations that interest rate cuts are nearing.

• 2Q24 results beat forecasts, with earnings of SGD1.9bn (-2% QoQ, +14% YoY) bringing 1H24 PATMI to SGD3.9bn (+9% YoY) – at 54% of our and Street FY24 estimates. Non-II was surprisingly resilient despite the high base in 1Q24, coupled with better-than-expected opex control and benign impairment charges. 1H24 reported ROE was 14.5% (FY23: 13.7%) but CET- 1 slipped 70bps QoQ to 15.5% due to the payment of the 4Q23 dividend and higher RWA (on loan growth plus higher market risk from hedges).

• Results highlights. Non-II was stable (+1% QoQ; +12% YoY) as higher other non-II and insurance income offset a moderation in fees (wealth management (WM) down QoQ) and trading income. Also positive was the 14% QoQ drop in amortisation and impairment charges (-40% YoY) on improved asset quality. Otherwise, NIM slipped 7bps QoQ (-6bps YoY) as OCBC deployed liquidity into higher-quality bonds, where yields are lower but will help shield NII when rate cuts begin. This shift is expected to continue and, hence, it thinks NIM would now end up at the lower end of the guided 2-2.25% range vs upper end previously. Annualised loan and deposit growth was 5% and 3%, while LDR ticked higher to 81.1% from 80.3% in 1Q24 (2Q23: 78.8%). Opex rose 2% QoQ (+3% YoY), but was generally under control. NPL dropped 7% QoQ (-11% YoY) on lower formation and higher recoveries, upgrades and write-offs, which lifted LLC to 138% (1Q24: 131%; 2Q23: 117%).

• Briefing highlights: OCBC’s move to defend NII ahead includes increasing its fixed rate asset mix and to introduce more hedges. Already, its efforts have lowered its sensitivity to rates – the latest being SGD4m impact/bp change vs 1Q24: SGD5-6m and SGD6-7m in 4Q23. It’s commercial real estate (CRE) exposure also received attention despite the improvement in NPL. While CRE valuations in developed markets like the US and Hong Kong are under pressure, OCBC pointed to mitigating factors such as having stopped financing office CRE in US, low loan-to-value for its CRE portfolio (<50%), and revaluing its collaterals at least annually. Its CRE exposure stands at 11% of group loans with 67% in Singapore, Malaysia, Indonesia and Greater China. Not much more was shared on Great Eastern except OCBC will continue to evaluate its options over the upcoming months.

• Following the better-than-expected results, we raise FY24-26F PATMI by 4%, 2% and 2% pa. Our new SGD15.70 TP was derived post earnings changes and a roll forward to FY25F (with an unchanged 2% ESG premium applied).

Source: RHB Research - 5 Aug 2024