OCBC Bank (“OCBC”) announced the bank will be issuing AT1 SGD subordinated notes at an initial price guidance (“IPG”) of 4.25%. The AT1 notes will not be callable for 5 years, after which it will have a call date on the 5th year. If not called, the notes will reset at the prevailing 5Y SORA-OIS plus the initial spread. The new issue qualifies as additional tier 1 (“AT1”) capital of the issuer and entails certain loss absorption features.
The issuer is rated Aa1 (Stable) by Moody’s, AA- (stable) by S&P and AA- (Stable) by Fitch. As the notes will be subordinated, the expected rating for the AT1 notes will be Baa1 (Moody’s), BBB- (S&P) and BBB+ (Fitch).
OCBC was established in 1932 and is ranked the second largest financial services group in Southeast Asia by assets. The group is also identified as one of the domestic systematically important banks by the MAS. OCBC key markets include Singapore, Malaysia, Indonesia and Greater China. It has more than 470 branches in 19 countries.
For its first quarter financial results ending 31 March 2022 (“1Q22”), group net profit was SGD 1.36b, which was a 39% increase quarter-on-quarter (“QoQ”) but down 10% on a year-on-year (“YoY”) basis. Net interest income increased by 4% YoY to SGD 1.5b due to asset growth of 5% but non-interest income fell by 23% YoY to SGD 1.14b. The fall in non-interest income was due to lower wealth management fees, trading income and life insurance profit.
In terms of its liquidity and capital position, as of 31 Mar 2022, customer loans grew 8% YoY to SGD 294b. Customer deposits also grew 10% YoY to SGD 348b and made up ~80% of the group’s funding base. OCBC’s common equity tier 1 (“CET1”) ratio was 15.2%, showing strong capital position and buffer above regulatory requirements.
MAS announced on 26 May 2022 in a statement that OCBC will be required to maintain additional regulatory capital for operational risk due to SMS phishing scams that occurred in Dec 2021. OCBC is required to apply a multiplier of 1.3x to its risk-weighted assets for operational risk, which results in approximately SGD 330m in regulatory capital and 0.21 percentage point impact to OCBC’s capital ratios.
In terms of relative valuation, the OCBC new issue is more attractive as compared to UOBSP 3.580% Perpetual Corp (SGD) (YTW: 3.12%) and UOBSP 2.550% Perpetual Corp (SGD) (YTW: 3.39%) which have call dates on Jul 2026 and Jun 2028 respectively. As this is an AT1 note, investors should be aware that the notes come with certain loss absorption features and that the final price guidance for the new bond would likely be lower than the initial price guidance.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in UOBSP 2.550% Perpetual Corp (SGD) and the analyst who produced this report holds a NIL position in the abovementioned securities.
Our podcast series, Yield Hunters, is available on Spotify, iTunes Podcasts and Google Podcasts. We share our thoughts on new bond issues and hold discussions on the fixed income space. Listen to our latest episode below and follow us!