Takeaways from OCBC 3Q results: Record net interest income brings earnings resilience

Broad overview

For OCBC’s 3Q results, total income or net revenue increased 13% from a year ago to $3.4 billion. Its 3Q net profit outperformed expectations slightly, with a 21% year-on-year (YoY) growth to $1.81 billion versus the $1.80 billion consensus.

The bulk of Singapore banks’ business is heavily dependent on net interest income, which accounts for around 70% of total revenue. In this aspect, OCBC has held up well, with stable net interest margin (NIM) and steady loan demand translating to resilience in its net interest income (+17.0% YoY). Similar to DBS and UOB, net fee income also held up with a 4.4% YoY increase, tapping on higher wealth management fees (+16% YoY) and higher credit card fees.

Net interest margin likely peaked, but taper at a gradual pace

After OCBC’s NIM touched its high at 2.31% in 4Q 2022, margin has been tapering at a gradual pace, with recent 3Q NIM coming in at 2.27% from previous 2.26%. Thus far, benchmark lending rates have been moderating rather slowly on a high-for-longer rate outlook, while additional repricing of loans may potentially provide some cushion. OCBC has revised its NIM target for 2023 to 2.25% from previous 2.2% - a positive sign that net interest income may stay supported ahead.

Thus far, its net interest income has yet to see a peak, with its push to a new record high at S$2.46 billion in 3Q. Nevertheless, while earnings may continue to consolidate around current levels, the strong year-on-year growth momentum that we have seen over the past year may be harder to sustain moving forward, given that the bulk of the interest rate upcycle is most likely behind us.

Macroeconomic uncertainty remain on watch, but well-capitalised to weather any downturn

OCBC’s asset quality has remained healthy thus far, with its non-performing loan ratio at 1.0% in 3Q versus previous 1.1%. But similar to DBS and UOB, OCBC has also moved to build up their loan loss allowances to safeguard against any future potential financial risks, with a 19.5% increase in 3Q at S$184 million.

OCBC Group CEO Helen Wong guided that “looking ahead, macroeconomic conditions are expected to be clouded by growing uncertainties from inflationary risks, tightening monetary policies and heightened geopolitical risks”.

Nevertheless, its Common Equity Tier 1 (CET1) capital ratio stands at 14.8%, which is ahead of its minimum regulatory requirement and provides a strong capital buffer to weather any downturn. Given that downside risks to global economic conditions persist, rising asset quality risks will remain a key theme to watch in 2024, where we could see banks having to set aside more allowances to prepare for tougher times at the expense of profits.

Valuation/Dividend

Based on a price-to-book and price-to-earnings valuation, UOB seems to be the cheapest out of all three local banks. But OCBC stands out by having the highest dividend yield of 6.1%, versus DBS (5.4%) and UOB (5.8%).

Technical Analysis

OCBC share price has been drifting on higher lows lately, trading within a rising channel pattern alongside a near-term bullish crossover on its daily Moving Average Convergence/Divergence (MACD). On the broader scale, an ascending triangle pattern remains intact, with the upper horizontal resistance at the S$13.23 level on watch. On the downside, immediate support may be found at the lower channel trendline at the S$12.80 level.