• 1Q22 earnings of S$1.36bn were in line with our estimates despite lower-than-expected non-interest income which were offset by higher net interest income and lower allowances. 1Q22 PATMI is 22% of our FY22e forecast.
• NII grew 4% YoY due to loan growth of 8% YoY despite NIM falling 1bp YoY to 1.55%. Total non-interest income fell 23% YoY due to unfavourable market conditions. Nonetheless, allowances fell 73% YoY to S$44mn.
• Maintain BUY with an unchanged target price of S$14.22. Our FY22e estimates remain unchanged. Catalysts include lower provisions and higher interest income as economic conditions improve. A 100bps rise in interest rates can raise NIM by 0.18% and PATMI by 10%. OCBC is our preferred pick amongst the three banks due to attractive valuations, upside in dividend from the 15% CET 1 and lower provisioning as the Indonesian and Malaysian economies recover.

Results at a glance

Source: Company, PSR

The Positives

+ Net interest income grew 4% YoY. NII grew 4% YoY and 1% QoQ led by loan growth of 8% YoY and 1% QoQ while NIMs declined 1bp YoY but grew 3bps QoQ to 1.55%. Loan growth was driven by Singapore, UK, Australia and USA. OCBC has guided  mid- to high single-digit loan growth for FY22e.

+ Allowances fell 73% YoY to S$44mn. Total allowances fell 73% YoY and 86% QoQ to S$44mn. GPs of S$13mn (4Q21: write-back of S$70mn) and SPs of S$31mn (4Q21: S$387mn) were made during the quarter. Total NPAs were down 1% QoQ but up 7% YoY to S$4.3bn, but the group NPL ratio improved by 10bps QoQ to 1.4%. NPLs in Malaysia were up 2% QoQ to S$1.5bn and NPLs in Indonesia were up 3% QoQ to S$1.24bn in 1Q22. Credit costs improved by 31bps to 6bps due to the improving credit environment.

The Negatives

– Total non-interest income fell 23% YoY. The YoY decline was mainly due to lower WM fees, trading income and life insurance profit coming off the previous year’s high which was underpinned by robust customer and investment activities due to favourable market conditions. However, total non-interest income grew 8% QoQ to S$1.14bn mainly from growth in trading and insurance income. Fee and commission income fell 11% YoY and 1% QoQ due a fall in credit card, loan and trade-related fees which offset a rise in WM and brokerage fees. Trading income fell 29% YoY but grew 48% QoQ due to an increase in customer and non-customer flow treasury income. Insurance income fell 34% YoY but grew 12% QoQ due to a rise in operating profit and mark-to-market gains from a decline in insurance contract liabilities due to a higher discount rate to value these liabilities, in line with rising interest rates.

Outlook

Loan growth: Loans grew 8% YoY in 1Q22 to S$294bn, meeting the bank’s guidance of a mid to high single-digit increase for FY22e. Management sees further lending opportunities in the wholesale segment and sustainable financing. Mortgage pipelines in Singapore and Hong Kong are also healthy, with more drawdowns expected in FY22.

China: OCBC’s total exposure to mainland China remains at 11% of Group loans, with onshore exposure at S$7bn and offshore exposure at S$27bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Less than one-third of the Group’s Mainland China onshore exposure (S$2bn) are corporate real estate loans, largely lending to the bank’s network customers. Greater China NPLs remained relatively unchanged and rose by 3% QoQ to S$1,244mn.

NIM: Management has guided stable NIMs of 1.5-1.55% for FY22e. Nonetheless, it said that based on historical data, a 100bps increase in rates would lead to a 18bps increase in NIMs. Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$725mn (or 11%) resulting in an increase in our FY22e PATMI by 10%.

Investment Action

Maintain BUY with an unchanged target price of S$14.22

We maintain our BUY recommendation with an unchanged GGM target price of S$14.22. We are keeping our FY22e forecast unchanged. We continue to assume 1.24x FY22e P/BV and ROE estimates of 9.3% in our GGM valuation. Catalyst includes lower provisions and higher interest income as economic conditions improve. A 100bps rise in interest rates can raise NIM by 0.18% and PATMI by 10%. OCBC is our preferred pick amongst the three banks due to attractive valuations, upside in dividend from the 15% CET 1 buffer and lower provisioning as the Indonesian and Malaysian economies recover.

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