Excerpts from UOBKayHian report

Oversea-Chinese Banking Corporation (SGX: O39)

• Oversea-Chinese Banking Corp (OCBC) delivered a near-record net profit of S$1,944m in 2Q24 (+14% yoy), supported by strong net trading income and lower credit costs.
• NPL formation was benign at S$108m. Loan-loss coverage improved 24ppt yoy and 9ppt qoq to 156%, the highest among the local banks.
• OCBC benefits from FDI inflows to ASEAN as multinational companies seek to diversify their supply chains. OCBC provides an attractive dividend yield of 5.9% for 2025.

Maintain BUY. Target price: S$18.70.

Purchased government bonds to insulate against rate cuts

Oversea-Chinese Banking Corp (OCBC) reported a net profit of S$1,944m for 2Q24 (up 14% yoy but down 2% qoq), above our forecast of S$1,644m.  NIM eased 7bp qoq to 2.20% in 2Q24 due to growth in lower-yielding high-quality assets.

Average assets expanded 3% qoq (loan growth of 1% qoq plus the purchase of government bonds), OCBC has shifted its asset mix to prepare for an environment of lower interest rates. Net interest income grew 1.7% yoy and was flat qoq.

Fees grew 8% yoy but receded 3% qoq in 2Q24

Contribution from wealth management increased 17% yoy but eased 7% qoq. OCBC saw an increase in customer activities across all wealth channels. OCBC attracted net new money inflow of S$6b in 2Q24. AUM increased by 2% yoy to S$279b.

Contributions from insurance normalised

Contributions from life and general insurance expanded 13% yoy to S$294m. Net trading income sustained growth at 14% yoy to S$356m, driven by record customer flows.

Improved cost efficiencies

Operating expenses increased 3% yoy in 2Q24. Staff costs increased by 3% yoy due to annual salary increments and higher headcount to support strategic initiatives.

Cost-to-income ratio was low at 37.8%, reflecting stringent cost discipline. OCBC recognised integration costs of S$12m relating to the acquisition of PT Bank Commonwealth in Indonesia.

Stable asset quality led to lower credit costs

NPL formation was benign at S$108m in 2Q24. NPL ratio improved 0.1ppt qoq 0.9%. Total provisions were S$144m in 2Q24, down 15% qoq. There was a small write-back in general provisions of S$10m.

Loan-loss coverage improved 24ppt yoy and 9ppt qoq to 156% due to lower NPLs. Its loan-loss coverage is the highest among the local banks.

Value creation from steady execution and delivering good results

OCBC achieved ROE of 14.2% in 2Q24. CET-1 CAR eased 0.7ppt qoq to 15.5% due to the payment of final FY23 dividend and higher risk-weighted assets. The board declared an interim dividend of 44 S cents (+10% yoy), representing a dividend payout ratio of 50%.

Maintain guidance

NIM is likely to hit the lower end of the guided 2.20-2.25% for 2024 given the interest rate outlook of two cuts for 2H24. Management expects a low single-digit loan growth. Credit costs are estimated at 20-25bp. ROE is expected to be 13-14%.

Valuation/Recommendation

Maintain BUY. Our target price of S$18.70 is based on 1.40x 2025F P/B, derived from the
Gordon Growth Model (ROE: 12.6%, COE: 9.0%, growth: 0.0%).

You can find the full report here and the company website here.