During the six-month period, the bank’s net interest income (NII) fell by 5% y-o-y to $4.63 billion against the backdrop of declining Singapore dollar (SGD) and Hong Kong dollar (HKD) benchmark rates; the impact of lower net interest margins (NIMs) more than offset volume growth.
In 1HFY2025, OCBC’s NIM fell by 25 basis points (bps) y-o-y to 1.98% while its NIM in the 2QFY2025 fell by 28 bps y-o-y and 12 bps q-o-q to 1.92%. Group CFO Goh Chin Yee shared at the group’s results briefing on Aug 1, that the bank’s exit NIM in June was 1.88%.
In the 2QFY2025, the one- and three-month compounded Singapore overnight rate average (Sora) fell by more than 50 bps while the one- and three-month Hong Kong Interbank Offered Rate (Hibor) rates fell by around 300 bps and 220 bps respectively. “Close to half of our loan book are denominated in SGD and HKD. About 80% of our SGD loans are on floating rates and nearly all our HKD loans are in floating rates,” Goh added.
As at the end of June, OCBC’s NIM sensitivity based on a 100 bps drop across its four major currencies — SGD, Malaysian ringgit (MYR), the HKD and US dollar (USD) — was around 12 bps on an annualised basis. The bank is maintaining its assumption of three Fed cuts for the rest of the year.
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While the NII came off from the previous year’s peak, this was mostly made up for by the double-digit growth in non-interest income. In 1HFY2025, non-interest income rose by 8% y-o-y to $2.57 billion thanks to higher fee and trading income. Net fee income rose from broad-based growth while net trading income was higher from growth in customer flow treasury income and higher treasury sales across the group’s markets. However, the growth in fee and trading income was offset by lower insurance income from Great Eastern Holdings. This was mainly due to the mark-to-market decline in interest rates on the valuation of insurance contract liabilities and lower valuation of private equity holdings from Great Eastern’s insurance funds.
Wong noted that the group’s resilience, which reflects its success in executing strategic initiatives to drive revenue growth, has brought its three-year plan to deliver $3 billion in incremental revenue from FY2023 to FY2025 “ahead of schedule”. As at 1HFY2025, the group has achieved “nearly close” to 90% of that $3 billion, she shares.
In the first half of the year, OCBC’s cost-to-income ratio increased to 38.9%, up from 37.5% in 1HFY2024, although the figure remains below the group’s target ratio being in the low 40s for the year.
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Credit costs, which rose by 3 bps y-o-y to 18 bps in 1HFY2025, also stood within the group’s FY2025 range of 20 bps to 25 bps. Loan growth remained on its mid-single-digit target with a 7% y-o-y growth to $325 billion. In constant currency terms, loan growth was up by 9% y-o-y.
1HFY2025 non-performing loans (NPL) remained unchanged at 0.9% and have been for the past five quarters since June 2024. However, non-performing assets (NPA) as at June 30, rose by 3.72% y-o-y to $3.01 billion from $2.90 billion as at end-June 2024.
On the uncertainties stemming from the trade tariffs, Wong notes that the bank has “always been prepared” and the world hasn’t seen the end of it yet.
While she does not see any “significant weakness” in the bank’s portfolio, she notes that the Hong Kong commercial real estate (CRE) remains a sector that the team is “closely monitoring”.
As such, the bank will continue to focus on a tight underwriting criteria, and will proactively derisk its portfolio where appropriate.
Jason Moo, Bank of Singapore’s CEO and head of private banking Singapore, notes that the increase in NPL relates to some of the loans at OCBC’s private banking arm, although the move is in line with its risk appetite.
“We've taken the prudent approach to these loans. We are still working through them, we’re actually making very good progress… but it's just a few loans that sits within our book that we've been quite prudent in our approach and working them through, and we hope to be able to write that back,” he says.
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In Hong Kong, deputy CEO and CEO-designate, Tan Teck Long, says the bank’s overall CRE exposure has come down as management has been downgrading its cases and increasing its expected credit loss (ECL) levels to two and three. He adds that management is “quite comfortable” with its portfolio as long as valuations do not decline.
Second half of the year to be more challenging
Even though OCBC did better than expected in the 1HFY2025, the second half of the year is likely to be more challenging, says Wong.
Apart from being resilient, the first half of the year also benefitted from better-than-expected GDP growth in the region, frontloading activities and policy support.
In the second quarter, however, tariffs and high geopolitical tensions created “uncertainty and challenges” with the possibility of “further fragmentation of global trade”.
“There could be potential inflationary impact from tariff shocks,” says Wong, which continues to “cloud” the operating environment in the second half of the year.
As such, she sees Asia to still be the place to be with trade, investment and outflows across Asean and Greater China continuing. “We still see… pockets of growth opportunities in the region and our key markets,” she says.
Tan noted that the uncertainty from the tariffs saw customers re-evaluating their investment decisions. Any chain reaction hasn’t fully manifested yet as well, although the silver lining is that businesses in Singapore are net importers who import their raw materials for domestic activities.
“For example, the construction industry can benefit from a lower cost of raw materials,” he says.
On the bank’s loan book, Tan says the bank’s loan growth following Liberation Day in April continues to remain healthy thanks to loans in industries such as data centre projects and real estate projects in Singapore.
He adds that for the 2HFY2025, the bank is still optimistic that it can maintain its pace of loan growth and stick to its guidance for the year-end.
Succession planning
Tan, whose appointment was announced on July 11, was selected via a “comprehensive global search” comprising a pool of internal and external candidates, says Wong.
“At OCBC… we take succession planning very seriously,” she adds. “For key positions, we’ve always identified internal candidates, have relevant development plans for candidates.” Yet, to ensure it has the right person for the job, it is also fair to look externally to confirm the best candidate.
With these factors in mind, Tan was eventually chosen by the board “unanimously”.
In its July 11 announcement, Andrew Lee, chairman of OCBC’s board of directors, lauded Tan’s qualities.
“He has demonstrated sterling leadership that goes beyond growing the wholesale banking business; as chair of the OCBC Strategic Resilience Group, he has shown the ability to zero in on the critical issues, be forward-thinking and act decisively,” he wrote at the time. “With Teck Long’s appointment, there will be no disruption to OCBC’s corporate strategic direction of becoming an integrated financial services powerhouse.”
Tan, who will be succeeding Wong on Jan 1, 2026, has already begun to take on more responsibilities, she shares.
To Tan, OCBC has “one of the best platforms” in Southeast Asia and Greater China, with these regions being “the place to be” amid economic headwinds and tariffs with the former’s GDP growth rate remaining one of the fastest in the world.
On his growth strategy, Tan says he is interested in growing the bank through organic and inorganic means.
“For organic growth, we want to continue to strengthen our competitive vision in the market to serve our customers better,” he says. “For inorganic growth, we are also looking at opportunities.”
However, inorganic growth will also depend on opportunities that come by the bank’s way. It will also have to fit Tan’s two main criteria, which is it should fit in the bank’s strategy and it has to come at a “reasonable cost”.
Dividends
In 1HFY2025, OCBC declared an interim dividend of 41 cents for the 1HFY2025, 6.8% lower than the interim dividend of 44 cents in 1HFY2024. However, Wong notes that the amount is still within the group’s dividend policy of paying out 50% of its net profit.
She adds that the bank is remaining committed to its $2.5 billion capital return initiatives via special dividends and share buybacks over two years. This includes 10% of the bank’s group net profit for FY2025 in dividends, representing a total payout of 60%.
When asked whether its absolute dividend will be lower this year, Wong said it depends on the bank’s balance sheet and capital position even though the bank has considered paying above its dividend policy previously.
“But a dividend policy is a dividend policy, meaning it is very clear. So if you have the percentage, that means we are paying at least that amount out from our profit,” she says. “But will we pay more? It will depend on [our capital position].” The group will also consider its capital position before deciding on its final dividend, she adds.
Goh stressed that OCBC’s interim dividend has always been 50% of its payout since the bank announced its dividend policy in early 2023, and the bank has consistently delivered that for three years in a row.
Reiterating Wong’s point about considering its capital position, given that the bank will need capital to support its growth and strategies, Goh added that the bank will need more buffer amid market headwinds.
“I'm also very aware that we should set aside some dry powder for [our] new CEO who may want to go shopping, although I’m very glad he said valuation matters a lot,” she laughs.
To Tan, there are “multiple considerations” such as the capital needed for these uncertain times and how the bank can look at adding value to the shares.
However, Tan remains focused on looking to continue to grow the bank’s franchise, which is the “most imperative ask” for him.
‘Satisfied’ with Great Eastern outcome
On Great Eastern’s shareholders voting against the delisting at its extraordinary general meeting (EGM) on July 8, Wong said she is “happy” and “satisfied” as OCBC had fulfilled its objective in gaining a higher stake in the insurance company. “We were successful [in] increasing our stake… rising from 88.44% to 93.72%. If the increase was substantial enough to result in the delisting, we welcome it. It did not, but it is also acceptable to us.
With the increase in its stake, the group will also continue to “accelerate synergistic work” with Great Eastern, Wong adds.
Analysts’ calls
Analysts have so far maintained their estimates following OCBC’s results.
DBS Group Research analyst Lim Rui Wen has a “hold” call as the bank’s 2QFY2025 revenue and net profit stood within her expectations thanks to very low credit costs, which are unsustainable, in her view.
The NIM decline of 12 bps q-o-q was also expected.
With OCBC’s dividend lower due to its lower earnings, Lim sees potential reallocation by investors among the Singapore banks.
“Consensus was still expecting DPS (dividend per share) to be maintained at 44 cents despite lower EPS (earnings per share) as management previously guided ’60% total dividend payout ratio, combined with share buybacks as part of the $2.5 billion capital return over a two-year period,’” she notes. “This has been reworded to suggest that they will only pay higher DPS in 2HFY2025.”
In her Aug 1 note, Lim has maintained her target price to $14.40, which she downgraded from $17.60 in April. Her target price represents an FY2026 P/E of 1 times, below OCBC’s historical 12-year average one-year forward P/BV.
“We believe this is a fair valuation with limited catalysts ahead for the share price. Downside to OCBC’s share price will be supported by its strong NPL coverage ratio of 162%,” she says.
CGS International analysts Tay Wee Kuang and Lim Siew Khee have maintained their target price of $17.20 as OCBC’s 2QFY2025 core net profit stood in line with their estimates. Yet, the analysts have also kept their “hold” as they await more clarity on OCBC’s capital return initiatives beyond FY2025.
Citi Research analyst Tan Yong Hong has kept his “neutral” call even though OCBC’s 2QFY2025 results beat his expectations on discipline on its operating expenses (opex) and benign provisions.
In FY2025, Tan has lowered his NII estimates by 3%, implying a 5% y-o-y decline. He is also expecting OCBC to report 2HFY2025 NIM of between 1.82% to 1.92% based on management’s FY2025 NIM guidance of 1.90% to 1.95%.
“NII guidance of up to 5% appears lower as we think some of it should be offset by volume growth,” he says.
The analyst has also lowered his DPS forecast for FY2025 to 96 cents, which is down from OCBC’s FY2024 dividend of $1.01. Tan’s estimate is based on a 60% payout ratio assuming ordinary dividends of 82 cents and a special dividend of 14 cents. FY2026’s DPS ie likely to remain flat on the back of unchanged earnings expected in that year.
Including a $1 billion share buyback split equally across FY2025 to FY2026, Tan notes that the payout ratio would likely be at 66%.
That said, the analyst likes the bank’s “robust” asset quality, with the likelihood of an upgrade in credit risk profiles. This is given that the probability of defaults in June stood at 1.16%, which was 30 basis points lower compared to December 2024. “Management also indicated that Hong Kong CRE exposure came down (previously disclosed in 1HFY2024 was [around] 2% of loans from 4QFY2023’s 2.3%).
As Tan rolls his forecasts to FY2026, his target price is increased to $16.30 from $15.80 previously.
Bloomberg Intelligence senior credit analyst Rena Kwok sees OCBC’s income-producing real estate portfolio remaining “resilient” till the year-end with the probability of default increasing slightly to 2.26% in 1HFY2025 despite weakness in Hong Kong CRE.
“The bank is likely to boost mortgages with pricing discipline -up 3% in 1HFY2025 versus 4QFY2024-with a low 1.15% default risk as of 1H to support earnings as rates fall,” Kwok writes.
Maybank Securities’ Thilan Wickramasinghe have maintained his “hold” call as OCBC’s core profit after tax met his expectations.
“We believe earnings momentum has peaked and CEO-transition could delay clarity in capital management. However, a decent existing dividend yield, potential China turnaround and safe haven flows to Singapore should limit downside,” he says in his Aug 3 report. The analyst has a higher target price of $17.78 from $17.08 previously.
Goldman Sachs and UOB Kay Hian have maintained their “buy” calls with higher target prices of $20 and $20.15, respectively. Goldman’s previous target price was $19.60 while UOB Kay Hian had a target price of $19.25 before.
“Overall, we view it as a decent set of results with decent performance across operation lines despite pressure in margin,” writes Goldman Sachs. “We expect the diversified revenue sources, active hedging strategy, and cautious risk management to enable OCBC to better navigate the current environment with lower rate and high uncertainty.”
In addition to its higher target price, Goldman Sachs has increased its net income estimates for FY2025 to FY2027 by 1.6%, 1.9% and 0.8% to $6.82 billion, $7.06 billion and $7.5 billion respectively as they work in higher loan growth and lower credit costs for FY2025.
UOB Kay Hian analyst Jonathan Koh also raised his net profit forecast by 2.4% for FY2025 and 1.5% for FY2026 due to a slightly lower NIM and a slight moderation in credit costs given the easing in trade tensions.
Shares in OCBC closed 8 cents lower or 0.47% down at $16.79 on Aug 1.
