Should You Buy OCBC Stock After Record Q3 2022 Earnings?

November 7, 2022

Oversea-Chinese Banking Corporation (SGX: O39), or simply known as OCBC, has joined both DBS Group Holdings Ltd (SGX: D05) and United Overseas Bank Ltd (SGX: U11), in reporting record quarterly earnings.

OCBC’s net profit surged by 31% year-on-year (yoy) to S$1.60 billion in Q3 FY2022.

Similarly, the Group reported an increase of 14% yoy in its net profit during the 9M FY2022 to S$4.44 billion.

Overall, OCBC’s earnings beat consensus expectations. So, here are the four key highlights from OCBC’s latest record earnings and I also try to answer whether investors should buy OCBC shares now.

1. Net income margin surprises on the upside

OCBC reported a positive surprise on its net income margin (NIM) in Q3 FY2022.

During the quarter, NIM expanded by 35 basis points (bps) from the previous quarter, driving an increase of 23.5% in its net interest income (NII).

Meanwhile, NIM expanded across its key markets, attributable to higher asset yields that outpaced the rise in funding costs.

Source: 3Q FY2022 Financial Highlights

2. Non-interest income dipped 11% on the quarter

During the quarter, non-interest income (NII) was down by 11% from the previous quarter – mainly due to lower trading and insurance income.

Meanwhile, on a yoy basis, OCBC’s NII slipped by 4.0% amid lower fee income and the disposal of investment securities. This was partly offset by higher trading and insurance income.

Source: 3Q FY2022 Financial Highlights

Fee income during the quarter was also affected by a decline in wealth management as a result of the weak market sentiment.

This was, however, mitigated by the growth in other segments such as credit card-, loan- and trade-related fees.

Source: 3Q FY2022 Financial Highlights

3. Improvement in cost-to-income ratio

In line with the reopening of the economy, OCBC incurred higher expenses in Q3 FY2022, mainly due to higher staff costs to support business expansion as well as higher salary adjustments.

Despite that, the bank’s cost-to-income ratio has improved for both Q3 FY2022 and 9M FY2022 as income growth outpaced expense growth.

Source: 3Q FY2022 Financial Highlights

4. OCBC on track to deliver FY2022 loan growth target of mid-single digits

Management has also guided that OCBC is firmly on track to deliver its defined targets for FY2022.

Among some of these targets are the mid-single-digit loan growth, Q4 FY2022’s NIM above 2.1% and full-year credit cost at low- to mid-teens.

While global growth is likely to be subdued, economic resilience in key markets, such as ASEAN, is positive for the bank’s earnings momentum.

Should we buy OCBC shares?

Currently, OCBC has a dividend yield of 5.0%, which offers the highest dividend yield for investors when compared to both DBS and UOB.

With the rising interest rate expected to continue, and the Fed funds rate expected to go even higher than 5%, OCBC’s earnings are likely to benefit from it.

Given OCBC is in a prime position to benefit from the rising interest rate environment, its resilient asset quality and its overall improvement in operating metrics, investing in OCBC could add value for shareholders.

I believe that until the Fed’s pivot away from the aggressive rate hike cycle and monetary policy tightening path, this stance will still be beneficial to OCBC’s business.

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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