OCBC to leverage on rising Asian wealth

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PETALING JAYA: Singapore’s Oversea-Chinese Banking Corp (OCBC) plans to tap on several growth drivers in the coming years, including rising wealth in Asia through hubs in Singapore and Hong Kong, Asean-China trade and investments, and the transition to a sustainable low-carbon world.

According to UOB Kay Hian (UOBKH) Research, the banking group will invest to strengthen its comprehensive regional franchise and accelerate its digital transformation.

With OCBC being present in Asean countries including in Malaysia, UOBKH Research believes its prospects for Asean countries are positive.

This is because of the resilience of Asian economies, as well as the easing of safe distancing measures and the resumption of air travel post-Covid-19 pandemic.

“In particular, Malaysia and Indonesia will benefit from the recovery in domestic consumption and higher energy and commodity prices,” it said in a research report.

According to the research house, management has guided for a mid to high single-digit loan growth for 2022.

“The magnitude of loan growth depends on whether higher inflation affects customers’ expansion plans and how severely economic growth slows down in response to higher interest rates,” the research house said.

The research house expects the net interest margin (NIM) to be higher between 1.55% and 1.58% compared to 1.54% in 2021, while credit costs are expected to be between 20 basis points (bps) and 25bps compared with 29bps in 2021.

The bank posted robust results for the first quarter of its financial year 2022 (1Q22) backed by a strong contribution from insurance as well as net trading income and lower credit cost.

OCBC reported a net profit of S$1.36bil (RM4.27bil) for 1Q22, 10% lower year-on-year (y-o-y) but a 39% surge quarter-on-quarter (q-o-q).

The net income reported was better-than-expected as it exceeded UOBKH Research’s forecast of S$1.11bil (RM3.49bil).

The research house said loans expanded 8% y-o-y and 1% q-o-q in 1Q22, as OCBC supported its network customers in expansion overseas to acquire logistics, data centres and student accommodation properties.

Meanwhile, NIM expanded three bps q-o-q to 1.55% benefitting from the hike in the Fed Funds Rate of 25bps in March and the affiliated increase in the loan yield.

At the same time, there was a 10% y-o-y growth towards its customer deposits while its current account and savings account or CASA ratio improved 0.9-percentage-point (ppt) y-o-y to 62.7%.

Fees were down 11% y-o-y but flat q-o-q in 1Q22, while contribution from wealth management dropped 20% y-o-y but increased 3% q-o-q.

However, OCBC’s assest under management or AUM grew 1% y-o-y to S$251bil (RM789bil).

“High-net-worth clients have turned cautious as they see headwinds from the Russia-Ukraine war and heightened geographical tension,” it said.

The bank’s contributions from life and general insurance was resilient at S$330mil (RM1.04bil) in 1Q22, a 30% decrease y-o-y but a 10% increase q-o-q.

“It benefitted from mark-to-market gains from a decline in insurance contract liabilities due to the utilisation of a higher discount rate to value these liabilities,” it said.

“Net trading income was also strong at S$225mil (RM707mil),” it added.

The bank’s cost efficiency improved as the operating expenses receded 7% q-o-q in 1Q22 due to lower discretionary spending and the absense of one-off operational charges compared to the final quarter of its financial year 2021.

However, the bank’s staff cost reported an increase of 7% y-o-y.

Speaking of non-perfoming loan (NPL) formation, the research house noted the NPL formation normalised at S$296mil (RM930mil) in 1Q22 after taking a hit in 4Q21 where NPL was at S$1.06bil (RM3.33bil).

“NPL balance declined slightly by 0.7% q-o-q due to recoveries and upgrades of S$240mil (RM754mil) mainly from the offshore support vessel or OSV sector in Singapore,” it said.

The research house noted that the NPL ratio improved 0.1 ppt q-o-q to 1.4%.

“Total provisions were 73% lower y-o-y at only S$44mil (RM138mil) as OCBC has already set aside sizeable provisions for corporate loans in 4Q21,” it added.

The research house has maintained its “buy” call with a target price of S$14.88 (RM46.80) per OCBC share.