On Feb 28, OCBC announced a final dividend of 42 cents per share for 2HFY2023, taking dividends for FY2023 ended Dec 31, 2023, to 82 cents, up 20% y-o-y, and translating into a yield of 6.3%.
The aggregate dividend payout of $3.7 billion — a payout ratio of 53% — caps off record earnings of $7.02 billion for FY2023, up 27% y-o-y. This is the first time OCBC’s full-year net profit has surpassed the $7 billion mark.
However, analysts from UOB Kay Hian and Citi say investors were disappointed as market participants sold down the stock by 30 cents, or 2.25%, on Feb 28.
“Some investors are dismayed that OCBC did not declare a special dividend. OCBC has a long-term target of lowering common equity tier-1 (CET-1) capital adequacy ratio (CAR) to 14% but it has not set a pre-determined time frame for the goal to be achieved,” notes a UOB Kay Hian report.
See also: From OCBC: new guidance, details on incremental $3 billion income and CRE loans
OCBC’s CET-1 ratio rose 0.7% percentage points (ppts) y-o-y to 15.9% as at Dec 31, 2023. Following the final dividend payout, CET-1 will fall to 15.1%, which is the highest among local banks.
“We are committed to delivering the target of a 50% dividend payout ratio,” says Wong at OCBC’s Feb 28 results briefing. “So, if we grow well, if we continue to deliver, that would mean it is very possible to maintain a good quantum of dividend amount as well. But we want the dividend policy to be clear to our investors and our shareholders.”
See also: OCBC chairman says bank's 'one in 10 event' stress test meets market challenges
Before FY2022, OCBC had been viewed as somewhat parsimonious in its dividends. That has changed under Wong, who has led the bank since April 2021.
“We have a shift in communicating better with you so that you can anticipate what we are going to do,” she adds. “We are paying more than 50%. We did say that we will continue to look at the capital of our subsidiaries, to look at where the growth is going to be and what we’re going to do. We hope to have even more proactive and aggressive targets that we can share, but not today.”
Great Eastern Holdings (GEH), OCBC’s 88%-owned insurance subsidiary, has traded at a discount to its embedded value compared to insurers like AIA.
Last year, Singapore Life changed hands at the equivalent of two times its embedded value, market-watchers say.
Some are wondering if OCBC could give a special dividend-in-specie of GEH shares to OCBC shareholders. However, some OCBC shareholders may not be interested in GEH shares. On the other hand, with more liquidity, GEH shares could trade higher towards its embedded value of $36.59.
Meanwhile, for OCBC itself, the new Basel IV regime is likely to add around two ppts to CET-1. However, this will erode as the output floor kicks in. The impact is similar to that articulated by the management of DBS and UOB.
NIM outlook higher than peers
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Aside from dividends, Wong’s 2024 net interest margin (NIM) target — “in the range of 2.20% and 2.25%” — is notably higher than OCBC’s peers.
DBS CEO Piyush Gupta expects FY2024 NIM to come in slightly below the 4QFY2023 exit NIM of 2.13%, while UOB CEO Wee Ee Cheong has guided for NIM to be around 2%- 2.02% this year.
OCBC’s forecast assumes four rate cuts starting from 2H2024 but Wong stresses that the bank will manage its funding costs to maintain NIM. “We have done quite well to maintain that NIM,” says Wong. “We are still positive going into this year but [we are] still reflecting a drop if you look at the whole-year NIM of 2.28% and exit NIM of 2.26%.”
She also points to cost savings through economies of scale, as more customers open current accounts and saving accounts (casa) with OCBC.
In 4QFY2023, OCBC’s casa ratio improved to 48.7% from 46.3% in 3QFY2023. OCBC logged $364 billion in deposits as at Dec 31, 2023, up 4% y-o-y but down 2% q-o-q. Of this figure, OCBC ended the year with $177 billion in casa deposits, down 2% y-o-y but up 3% q-o-q.
Should loan yields fall, OCBC could offset these declines by managing its securities portfolio. As at Dec 31, 2023, OCBC has some $2.57 billion in interest-earning assets. These assets earned an average interest of 3.62% last year, much higher than the 2.29% average interest in FY2022.
Kenneth Lai, head of global markets, says these assets “tend to be high-quality liquid assets (HQLA)” and the duration of the portfolio is relatively short at between two and three years for debt securities. For credit bonds, “the majority of the portfolios tend to be rated A or better”, Lai adds.
OCBC’s net realised gains from the sale of investment securities was $47 million in FY2023. In comparison, DBS and UOB reported net income from investment securities of some $217 million and $90 million respectively.
According to DBS’s Gupta, DBS has some $40 billion in fixed-rate assets that are repricing this year, which will get a yield uplift of about 1.7%–1.8%. This equates to about $400 million. “We have added $30 billion-plus of duration, locking in yields around the 4.5% level for the next two, three years.”
Meanwhile, UOB CFO Lee Wai Fai says the bank started extending the duration of the portfolio in 2HFY2023 but US rates have been volatile.
Most of DBS’s and UOB’s portfolios comprised mainly of Singapore and US T-bills and treasuries.
‘Muted’ loan growth ahead
The three banks have seen mostly flattish loan growth. OCBC’s customer loans rose 2% y-o-y in constant currency terms to $297 billion in FY2023, comparable to peers DBS and UOB, which saw 1% and 2% loan growth y-o-y respectively.
As at Dec 31, 2023, corporate, small- and medium-sized enterprises (SME) and consumer/private banking comprise 55%, 10% and 35% of OCBC’s loan book respectively.
Some 31% of loans went towards the building and construction sector, making up the largest segment across industries, followed by housing loans (22%) and professionals and individuals (11%).
According to OCBC, loan growth for the year was driven by both non-trade corporate and housing loans, which compensated for weak trade loan demand. Across markets, the increase was led by higher loans in Singapore, Australia, Europe and the UK.
Like her peers Gupta and Wee, Wong is targeting “low-single-digit” loan growth this year, citing “muted” demand.
However, Wong also sees “pockets of opportunities in various sectors”, including energy and power and utilities. “This is always paired up with renewable energy as well because we continue to see demand from our customers going on the net-zero path.”
Wong also sees demand from “inflation-resistant real estate segments”. “This is what we call purpose-built student accommodation, hospitality and others. Technology and digital infrastructure is another area that we see opportunities as well.”
As at Dec 31, 2023, sustainable financing loans grew 29% from a year ago to $38.4 billion. This is against a total sustainable financing loan commitment of $56 billion, which is up from $44 billion as at the end of 2022.
The bank had announced on Feb 5 that it extended over $7 billion in sustainable financing to over 1,200 SMEs across the region in 2023, more than double the amount issued in 2022.
US commercial real estate
Loans to the commercial real estate (CRE) office sector accounted for 12% of all loans. According to OCBC, two-thirds of these loans are in its key markets of Singapore, Malaysia, Indonesia and Greater China.
Loans to the US office sector make up just 0.7% of the loan book and these are “mainly” secured by Grade A office properties, says OCBC, “largely to network customers and strong sponsors”.
In fact, OCBC has not financed US CRE for more than a year, says Tan Teck Long, head of global wholesale banking. Some sponsors have decided to top-up or restructure their loans, he adds, but the bank has “enough overlays”, and is “quite comfortable”.
The situation may improve soon. Tan adds: “We [have] noticed some activity — bottom-pickers, shall we say — and we will calibrate our strategy when the situation becomes clear in the overall market.”
OCBC’s non-performing loan (NPL) ratio of 1.0% in FY2023 was 0.2 ppts lower than the previous year. Total allowances, however, reached $733 million, up 25% from $584 million in the previous year.
FY2023 credit costs rose 4 basis points (bps) to 20bps, of which impaired loans contributed 8bps in FY2023, double the 4bps recorded in FY2022.
Overall, Wong maintains that there is “no indication of any structural weaknesses” in OCBC’s portfolio. This year, Wong targets credit costs to come in between 20bps–25bps.
Use of capital
Over the past two years, OCBC has been focusing on organic growth with record quarterly profits from its traditional commercial banking and wealth management businesses.
On the inorganic front, GEH acquired AmMetLife Insurance and AmMetLife Takaful in Malaysia for the equivalent of $325 million.
“Great Eastern Malaysia will gain an exclusive 20-year bancassurance and bancatakaful agreements for the distribution of life insurance and family takaful products through the distribution network of AmBank (M) Berhad and AmBank Islamic Berhad across Malaysia,” says UOB Kay Hian.
OCBC also acquired PT Bank Commonwealth in Indonesia for $191 million to accelerate growth in Asean.
“Both acquisitions are in our key markets and complement our businesses and growth plans,” says CFO Goh Chin Yee.
In July 2023, OCBC unveiled its brand and strategic refresh, including a plan to capture an additional $3 billion in revenue by 2025.
According to Wong, OCBC “quite squarely” logged incremental revenue of $500 million in FY2023. This means the bank has achieved the first of three checkpoints in its three-year target.
The next milestone will be to deliver $1 billion in incremental revenue by end-FY2024, followed by the remaining half in FY2025. With less than two years until the deadline, analysts have asked what is next for the bank. Wong says her team will unveil the following threeyear plan “later in the year”. — With additional reporting by Goola Warden
Infographics: OCBC
