OCBC announces USD 10NC5 Tier 2 subordinated notes at IPG of CT5 + 145 bps

Brief Introduction

Oversea-Chinese Banking Corporation Limited (“OCBC”) announced the planned issuance of USD 10NC5 Tier 2 subordinated paper at the initial price guidance (“IPG”) of the current 5-year US Treasury + 145 basis (“bps”). The figure is approximately 5.96% as of 13 May 2024, based on the yields provided by Bloomberg Finance L.P. The subordinated note is expected to be issued on 21 May 2024, with the call date on 21 May 2029 and the maturity date on 21 May 2034. If uncalled, the coupon will reset based on the then-prevailing 5-year US Treasury rate and the initial spread (to be determined upon issuance). The new issue is made available for accredited and institutional investors only.

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’s key markets include Singapore, Malaysia, Indonesia, and Greater China, with more than 400 branches and offices established across these areas. OCBC reported a total of SGD 581b in total assets as of end-2023.

OCBC’s Financial and Credit Highlights

OCBC saw strong performance for FY23, with net profit seeing a +27% year-on-year (“YoY”) increase. The profit jump stemmed from a record-high net interest income which grew +25% YoY, while non-interest income saw a slightly smaller +7% YoY increment, owing to improvements in trading income. OCBC’s earnings outlook continues to look optimistic - on the basis of NIM to remain elevated for the Group. Management guided NIM to remain in the range of 2.20% to 2.25%, which we believe is achievable especially with little to no Fed rate cuts in 2024, allowing front-end rates to stay elevated. 

For the full coverage of OCBC’s FY23 results, please refer to our article here - Idea of the Week – Why you should consider this OCBC USD bond yielding around 6%

For the first quarter ended 31 March 2024 (“1Q24”), OCBC reported yet another record quarterly profit – up +22% quarter-on-quarter (“QoQ”) at SGD 1.98b. Its total income increased considerably by +8% YoY and +11 QoQ, largely driven by improvements in non-interest income (+17% YoY and +47% QoQ). In particular, the surge in non-interest income performance QoQ was due to a record customer-flow treasury income and significant improvements in insurance income from its subsidiary, Great Eastern Holdings.

OCBC’s net interest income (“NII”) experienced a slight drop to SGD 2,437m in 1Q24, down from SGD 2,462m in 4Q23. Net interest margin (“NIM”) similarly fell by 2 basis points, falling from 2.29% (4Q23) to 2.27% (1Q24). Despite some growth in loans (by 1%), OCBC noted that the rise in funding costs has outpaced the asset yields, resulting in the moderation for NIM.

On the other hand, costs remain well controlled for OCBC. Operating expenses might see a small increase from SGD 1,310m (4Q23) to SGD 1,346m (1Q24), primarily due to an increase in staff costs. However, the Group’s cost-to-income ratio fell from 40.0% to 37.1% across the same period.

OCBC’s asset quality and solvency profile continues to look great. Non-performing loans ratio has been well-managed, constant at 1.0% across 4Q23 and 1Q24, while total allowances for both impaired and non-impaired assets decreased, from SGD 187m (4Q23) to SGD 169m (1Q24).

OCBC’s CET1 ratio improved to 16.2% in 1Q24, up from 15.9% in 4Q23, owing to the strong profit accretion. Taking into account the final dividend to be paid for FY23, the pro forma CET1 ratio is expected to fall to 15.3% - which allows OCBC to remain in a strong capital position. OCBC’s liquidity coverage ratio (“LCR”) and net stable funding ratio (“NSFR”) are reported at 146% and 115% for 1Q24, both well above the regulatory requirements.

Recently, OCBC announced a voluntary unconditional general offer to purchase the remaining shares in Great Eastern Holdings (“GE”), which it currently holds 88.44% of the ownership. For 1Q24, GE contributed SGD 260m to OCBC’s profit, accounting for approximately 13% of the net profit. With a possible moderation in NII in the medium-to-long term, the decision to obtain full ownership of its insurance business makes sense for the Group. OCBC continues to see growth plans for GE, particularly in capturing opportunities across Asian markets which should eventually help to negate the moderation in NII.

OCBC expects to spend about SGD 1.4b from its internal cash for the purchase. While this may impact its CET1 ratio, we expect it to be relatively minor considering the Group’s strong capital position. Pro forma CET1 ratio (accounting for both the FY23 final dividend and the purchase of GE remaining shares) will fall to 14.5%. We expect OCBC’s potential rise in FY24 overall earnings to offset a large degree of the funding spent, especially with a 100% profit contribution coming from GE after the purchase. OCBC highlighted that the pro forma FY23 Return on Equity would increase from 13.7% to 14.0%, with the full contribution of profit from GE.  

OCBC’s New Issue

Table 1
USD Tier 2 subordinated issuances

We find the new issuance to be rather competitive against other Tier 2 USD papers of similar maturity, at its indicative IPG. With that being said, we expect the final price guidance to be adjusted downwards from the IPG, especially with OCBC typically receiving strong market demand for its new issuances. At an estimated final price guidance of about 5.7%, the pricing on the new issuance will remain fairly attractive given its slightly higher rating assigned by Fitch.

Overall, OCBC has a sufficiently strong capital position reflected by its rating, with an additional boost to its credit standing owing to the stable monetary environment in Singapore. Despite the subordinated ranking, loss absorption remains quite unlikely to be exercised for OCBC, as well as other Singapore banks. Considering OCBC’s positive outlook in the near term, we believe the new issue will be a good option for investors seeking a Tier 2 paper within the USD market.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in ANZ 4.500% 02Dec2032 Corp (SGD), OCBCSP 3.900% Perpetual Corp (SGD) and OCBCSP 1.832% 10Sep2030 Corp (USD), and the analyst who produced this report hold a NIL position in the abovementioned securities.

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