Net Interest Margin Expansion Key Driver in Oversea-Chinese Banking Corporation's Q3 Result

Oversea-Chinese Banking Corporation’s, or OCBC's, third-quarter result was above our expectation with net profit increasing 31% year on year to SGD 1.6 billion, or 8% against last quarter. While net interest margin was a positive surprise similar to peers DBS Group and UOB, OCBC’s net interest margin of 35 basis points against the second quarter, to 2.06%, was the largest between the three banks. Higher asset yields were the main driver while the bank noted that a repositioning of its deposit book to focus on cash management accounts for SMEs and corporates also contributed. These cash management accounts are mainly current and savings deposits, which attract lower deposit costs relative to fixed deposits. Overall current and savings accounts declined as a percentage of total deposits, as deposits continue to migrate to higher-yielding accounts. This is in line with peers, and all three banks expect deposit costs to pick up in the fourth quarter and into 2023. We maintain our view on net interest margin in 2023 for all three banks to be above that in 2022. Our net interest margin assumption is revised higher to 1.87%, from 1.67% in 2022, to factor in the higher-than-expected net interest margin expansion. Quarter-on-quarter loan growth of 2% was also above our peers, while an operating expense increase of 1% against last quarter was also a positive. Our fair value estimate increases to SGD 17.50 from SGD 16 per share. This is mainly driven by higher net interest income, offset by lower fee income and higher operating expense growth assumption.