OCBC announces new SGD NC5.75 AT1 perps with IPG at 4.375%

Oversea-Chinese Banking Corporation Limited (“OCBC”) announced that the bank is planning to issue a non-call 5.75 years SGD Additional Tier 1 (“AT1”) Subordinated Perpetual Notes (“perp”) at the initial price guidance (“IPG”) of 4.375%. The perp has the first call date and first reset date in October 2029. If uncalled, the coupon on the perp will reset at the reset rate of 5-year SORA-OIS plus the initial spread (determined upon issuance).

OCBC was established in 1932 and is ranked the second-largest financial services group in Southeast Asia by assets. It holds an estimated SGD 560b worth of assets as of end-2022. The Group is also identified as one of the domestic systematically important banks by the MAS. OCBC’s key markets include Singapore, Malaysia, Indonesia, and Greater China, with more than 400 branches and offices established across these areas.

For the quarter ended 30 September 2023 (“3Q23”), OCBC saw further growth in total income and group net profit, rising by +13% and +21% year-on-year (“YoY”). While total income for 3Q23 fell by -1% quarter-on-quarter (“QoQ”), the group net profit rose by +6% QoQ from 2Q23. OCBC also saw an increase in the underlying net interest margin (“NIM”) across 3Q23 to 2.27%, an increment of +21 basis points (“bps”) YoY and +1 bps QoQ. Net interest income hit a record high in 3Q23 and, alongside further growth in non-interest income, contributed to the higher profits.

Asset quality remains largely stable. In 3Q23, the non-performing loans ratio fell to 1.0%, -0.2 percentage points lower YoY and -0.1 percentage points lower QoQ – back to pre-pandemic levels.  On the other hand, while credit costs had increased by +3 bps YoY to 17 bps it has normalized considerably towards pre-COVID levels.

OCBC continues to look well-capitalised. The Group’s CET1 ratio sits at a comfortable 14.8% as of 30 September 2023, despite falling slightly due to an interim dividend and an increase in risk-weighted assets. The all-currency liquidity coverage ratio (“LCR”) stands at 159% as of 30 September 2023, while the net stable funding ratio (“NSFR”) and leverage ratio stand at 116% and 6.8% respectively.  OCBC’s regulatory ratios continue to be well above the regulatory requirements.

The issuer is rated AA-/AA-/Aa1 by S&P/Fitch/Moody’s respectively, while the new issuance is expected to be rated BBB-/BBB+/Baa1 by S&P/Fitch/Moody’s respectively. We wish to highlight the loss absorption feature embedded in this perpetual security, in which the perp may be written off in the event of a Trigger Event as stated within the circular.

Table 1
SGD AT1 Perpetuals of similar credit rating and years to call  

Comparing the new issuance from OCBC against other SGD AT1 perps from major foreign banks, OCBC’s AT1 perps has a slightly lower yield given a moderately higher credit rating. However, comparing the new issuance against UOB’s and OCBC’s other AT1 perps, the yield appears to be fairly priced (considering that the final price guidance is likely to fall off from the IPG).

While OCBC boasts of a strong credit profile and primarily operates within a stable monetary environment in Singapore, we wish to remind investors that risk of loss absorption remains and AT1 instruments are prioritized towards loss absorption over other capital instruments. For investors who might be more risk-averse, senior unsecured bank bonds and Tier 2 subordinated bonds would be a better option given the lower priority towards loss absorption.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in UOBSP 2.550% Perpetual Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

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