Analyst Note| Michael Wu, CAIA |
OCBC reported a strong second-quarter result with the key positive being a sharp increase in net interest margin, underpinning a 13% quarter-on-quarter increase in net interest income. Loan growth of 1% was also supportive of net interest income growth. Overall net profit in the second quarter increased by 9% to SGD 1.48 billion. Asset quality improved as nonperforming loans/total loans declined to 1.3% from 1.4% last quarter, mainly due to recovery and upgrades in Malaysia and Indonesia. Positively, new nonperforming asset formation was also slower than last quarter. We adjusted our forecasts to factor in slower fee growth and weaker loan growth of 5%, offset by operating expense increasing at a slower pace. Our fair value estimate of SGD 16 per share is unchanged. While the common equity Tier 1 ratio of 14.9% remains above the bank’s comfort level of 12.5%-13.5% and continues to be a drag on the bank’s return on equity, a slight decrease in the ratio was due to higher risk weighted assets from loan growth, reflecting a utilization of capital for growth. The excess capital does provide room for further dividend growth in the second half, in our view. The first-half dividend of SGD 0.28 per share was up from SGD 0.25 from last year and our full-year dividend forecast is increased slightly to SGD 0.59.