• Stay NEUTRAL with SGD15.70 TP, 2% upside and c.6% FY25F yield. We recently met OCBC Bank for an update. We expect 3Q24 PBT to ease by low- to mid-single digit sequentially on softer operating income but YoY, we estimate a low- to mid-single digit growth thanks to non-II. Despite the potentially weaker earnings QoQ, we think investors will likely be looking ahead for clues as to how 2025 is expected to shape up. OCBC’s growth prospects may not excite but yields are very decent, in our view.

• NIM compression to dampen NII. We gather that the 3Q trends for NII drivers should remain consistent with 1H and/or guidance. Recall that 1H24 loan growth was 2% YoY while NIM of 2.23% was slightly ahead of the guided “low-end” of 2.20-2.25% range. Trade and currency remain headwinds to loan growth but mortgage growth has been stable. Also, we understand that despite the recent US Federal Funds Rate (FFR) cut, OCBC has not seen a meaningful pickup yet in mortgage refinancing activities – likely as borrowers hold off and await further cuts. On NIM, we expect further NIM compression due to ongoing efforts to protect NII. Recall that in the 2Q24 results briefing, OCBC guided for rates sensitivity of SGD4m impact/bp change vs 1Q24: SGD5-6m and SGD6-7m in 4Q23.

• Non-II – Can all cylinders keep firing? 1H24 non-II rose 15% YoY on broad base growth across the board – fees, trading, and insurance income. We think fees could stay healthy on wealth management opportunities, leaving insurance and trading income potentially being key areas that could impact overall non-II trend. 1H24 insurance income was up 17% YoY while trading income jumped 28% YoY to a record high. These may be a challenge to repeat in 2H.

• No loan impairment reversals for now, despite high LLC. Asset quality was benign in 2Q24 with gross NPL down 7% QoQ and 11% YoY due to lower new non-performing asset (NPA) formation and higher net recoveries, upgrades, and writeoffs. Consequently, LLC improved to 138% from 131% in 1Q24 (2Q23: 117%) while 1H24 credit cost of 15bps was trending below the 20- 25bps guidance. Asset quality remains under control and, hence, we would not be surprised if 9M24 credit cost continues to track below guidance. At this stage, we gather that OCBC intends to hang on to its provision buffers.

• Basel III reforms kicks off. Singapore banks are set to report capital ratios under the Basel III reforms regime this quarter. During the transitional period, OCBC had guided for an initial uplift of 2ppt but this will erode over the phase in period as the output floor rises. That said, its CET-1 ratio was expected to remain above 14% (2Q24: 15.5%) upon full implementation.

• Earnings forecasts and TP retained. Our TP of SGD15.70 is based on an intrinsic value with a GGM-derived P/BV of 1.13x, and a 2% ESG premium applied.

Source: RHB Research - 22 Oct 2024