OCBC Shares: Is the Bank a Buy After Q2 Profit Beat?

August 4, 2022

For dividend investors, there are three big bank stocks in Singapore.

One of them – Oversea-Chinese Banking Corporation Limited (SGX: O39), better known as OCBC – reported its Q2 2022 results this week.

For OCBC, earnings came in at S$1.48 billion in the Q2 FY2022 ended 30 June. That was 28% higher than the same quarter a year ago and beat the consensus forecast of S$1.26 billion in a Bloomberg poll.

Higher earnings for the Singapore-based bank were driven by the robust performance across its banking, wealth management and insurance businesses.

Meanwhile, OCBC’s H1 FY2022 earnings were up by 7% from a year ago to S$2.84 billion, mainly driven by higher net interest income and lower allowances.

In line with the better financial performance in the H1 FY2022, OCBC has declared an interim dividend of 28 Singapore cents per share, up from 25 Singapore cents last year.

Group CEO, Helen Wong, expects the overall economic growth in OCBC’s key markets to remain positive in FY2022 albeit at a slower pace on the back of the “heightened uncertainty” in the operating environment.

Here are some key takeaways from OCBC’s H1 FY2022’s financial performance.

1. Net interest income at record high

OCBC’s net interest income (NII) was up by 10% from a year ago to S$3.2 billion, a new high.

This was mainly attributable to a 6% increase in average asset balances and a 6 basis points (bps) rise in net interest margin (NIM) to 1.63%.

This is in line with our view given the rising interest rate environment that helps with the margin expansion.

Source: OCBC’s H1 FY2022 Earnings Presentation

2. Stronger insurance business offset decline in non-interest income

Non-interest income has moderated by 10% to S$2.32 billion in the H1 FY2022 as compared to a year ago, mainly due to the drop in fees, investments and trading income.

The strong earnings in the insurance business helped to offset the decline in the non-interest income segment.

Fee income & commissions declined by 13% as compared to a year ago, mainly on lower wealth management, brokerage and investment banking fees.

This is in line with the weaker investment appetite globally.

Source: OCBC’s H1 FY2022 Earnings Presentation

3. Loan growth well diversified

As of 30 June 2022, customers loans grew 8% from a year ago to S$298 billion.

Loan growth was driven by Singapore, Indonesia, and Greater China.

Source: OCBC’s H1 FY2022 Earnings Presentation

Loans are well diversified with corporate, SME and consumer/private banking comprising of 53%, 9% and 38% of its loan book, respectively.

4. Rising operating expenses

Like most businesses, OCBC’s operating expenses are also affected by inflationary pressure.

The bank’s operating expenses were higher, mostly driven by the rise in staff costs from annual salary increments and the increase in headcount to support growth.

OCBC has also continued to invest in its technology capabilities and promotional costs that are associated with the rise in business activity.

On a positive note, OCBC’s cost-to-income ratio has moderated lower during the Q2 FY2022.

Source: OCBC’s H1 FY2022 Earnings Presentation

5. Sound asset quality

Another positive takeaway from the earnings report is the improvement in its asset quality.

The non-performing loan (NPL) ratio has decreased to 1.3% as at 30 June 2022.

This is as recoveries and upgrades more than offset the new non-performing asset (NPA) formation.

Source: OCBC’s H1 FY2022 Earnings Presentation

6. Interim dividend increased by 12%

Investors will also benefit from the dividend received as OCBC increased its interim dividend by 12% year-on-year to 28 Singapore cents per share in the H1 FY2022 as compared to 25 Singapore cents in the same period in 2021.

The bank’s dividend payout ratio is only at 44%, providing dividend safety to investors looking for recurring income in their investment portfolio.

At this level, OCBC is trading at a 12-month forward dividend yield of 4.8%.

Source: OCBC’s H1 FY2022 Earnings Presentation

Positive outlook for OCBC despite near-term headwinds

Group CEO, Helen Wong, has guided in her Group CEO Remarks that the outlook for FY2022 remains positive despite near-term headwinds.

The growth in NII is expected to offset near-term pressure from non-interest income while loan growth is on track for the mid-single digit percentage range.

This should benefit investors who are looking for a local Singapore beneficiary of the rising interest rate environment.

However, downside risks remain. These include the recession risks from monetary policy tightening, potential rise in default rates from weakening of asset quality as interest rates rise, and ongoing uncertainty from the emergence of new COVID-19 variants.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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