OCBC Credit Update: Record Earnings but Should Investors Buy Its Bonds Yielding Up to 5.31%?

OCBC is Singapore’s longest-established bank and the second-largest financial services group in Southeast Asia by assets. It operates across four segments: Global Consumer / Private Banking, Global Wholesale Banking, Global Markets, and Insurance, the last through its subsidiary Great Eastern Holdings (GEH).

Its main strategic distinction from DBS and UOB is its insurance arm, which provides an additional earnings stream beyond banking. Like its peers, OCBC is increasingly relying on wealth management, trading and insurance income to offset pressure on net interest margins.

Record Earnings Driven by Non-Interest Income

For 2Q2026, net interest income (NII) rose 2.0% QoQ to S$2.3 billion but slipped 1.0% YoY as net interest margin (NIM) narrowed 22 bps YoY to 1.70%. The compression reflected the downward repricing of loans, along with higher wholesale funding costs. This was partly offset by balance-sheet growth, with interest-earning assets rising 12.4% YoY to S$535.0 billion and customer deposits increasing 12.8% YoY to S$459.0 billion.

Non-interest income was the main driver of earnings growth, surging 51.0% YoY to a record S$1.9 billion on broad-based gains. Trading and investment income recorded the strongest growth, rising 85.3% YoY to a record S$695.0 million. This reflected record customer flow income from both the wealth and corporate segments, as well as higher non-customer flow income, largely investment income from GEH as equity markets rebounded after 1Q2026. Insurance income from GEH's life and general insurance businesses jumped 68.0% YoY to S$382.0 million on robust underlying performance. Net fees and commissions grew 28.0% YoY to S$739.0 million, led by record wealth management fees, which rose 44.2% YoY to S$470.0 million. Other income, comprising net gains from the sale of investment securities and properties, rental and property-related income, and dividends from equity investments, grew 8.4% YoY to S$90.0 million.

Supported by its diversified earnings streams, OCBC's total income rose 17.6% YoY to a record S$4.2 billion, while net profit climbed 22.3% YoY to a record S$2.2 billion. Operating expenses increased 13.0% YoY to S$1.6 billion, driven by higher performance-related remuneration and continued investment to support business growth. As income grew faster than expenses, the cost-to-income ratio (CIR) declined to 37.8% from 39.1% a year earlier.

That said, the mix of the quarter's earnings deserves a closer look. Trading and investment income is inherently more volatile than fee income, and part of the 2Q2026 gain came from market-sensitive investment income at GEH, which may not repeat if equity markets soften.

For 1H2026, net profit rose 13.4% YoY to a record S$4.2 billion, from S$3.7 billion a year ago. Net interest income (NII) declined 3.1% YoY to S$4.5 billion, as net interest margin (NIM) narrowed 25 basis points to 1.73% amid lower interest rates, partly cushioned by 11.0% growth in average asset volume. Non-interest income more than made up the shortfall, rising 36.4% YoY to a record S$3.5 billion and lifting total income 11.1% YoY to S$8.0 billion. Trading and investment income grew 46.0% YoY over the half, a more moderate pace than the 85.3% seen in 2Q2026 alone. Operating expenses increased 9.8% YoY to S$3.1 billion, mainly on higher performance-related remuneration and continued technology investment. With income growth outpacing expenses, the CIR declined to 38.5%.

Following its 2Q2026 results, management raised its 2026 outlook, turning more constructive than in 1Q2026 on the back of strong first-half momentum. Loan growth is now expected in the high-single-digit to low-double-digit range, up from mid-single-digit, after loans grew 11.0% YoY on a constant currency basis in 1H2026. Total income is expected to grow, an upgrade from "stable to growing", as record non-interest income continues to offset a slight decline in NII. The CIR target was tightened to the low-40% range from low-to-mid-40%, reflecting better-than-expected cost discipline.

Credit Profile Remains Strong

Customer loans rose 11.0% YoY on a constant currency basis to S$364.0 billion, led by broad-based growth across corporate and consumer loans. Despite this, OCBC's non-performing loan (NPL) ratio held steady at 0.9%, unchanged from a year ago. This indicates that strong loan growth has not come at the expense of credit quality. Non-performing assets (NPAs) stood at S$3.1 billion as of 30 June 2026, up 4.0% YoY. New corporate NPAs amounted to S$423.0 million in 1H2026, most of which were recorded in 2Q2026, when two Greater China corporate real estate accounts were downgraded from special mention. These were more than offset by S$368.0 million of net recoveries and upgrades and S$139.0 million of write-offs.

Credit costs stood at 18 bps on an annualised basis for 1H2026. Total allowances rose 14.1% YoY to S$372.0 million, mainly from higher allowances for non-impaired assets, which grew 34.7% YoY to S$225.0 million. These included management overlays for macroeconomic uncertainties, including in Indonesia. OCBC's NPA coverage remained high at 163.0%, up from 156.0% a year ago, giving the bank a sizeable allowance buffer against impaired assets.

Looking ahead, management kept its full-year credit cost guidance at 20 to 25 bps, above the 1H2026 run rate. This reflects continued caution over geopolitical tensions and the impact of the war in the Middle East.

Strong Capital and a Deposit-Led Funding Base

Capitalisation remained strong despite some moderation in headline ratios. The fully phased-in Common Equity Tier 1 (CET1) ratio eased to 14.0%, from 15.3% a year earlier. This reflected growth in risk-weighted assets and the payment of the FY2025 final and special dividends, which formed part of OCBC's S$2.5 billion capital return plan due for completion by FY2026. Even so, the ratio remains in line with management's target operating level of 14.0%, leaving sufficient capital to support growth and provide a buffer against uncertainties.

Customer deposits rose 12.8% YoY to S$459.0 billion. Current account and savings account (CASA) deposits grew 11.3% YoY to S$226.0 billion, while fixed deposits rose 6.7% YoY to S$175.0 billion. The CASA ratio edged down to 49.3%, from 49.8% a year ago, as other deposits grew faster, but low-cost CASA balances still make up close to half of the deposit base. Funding remains deposit-led, with customer deposits accounting for 78.0% of total funding and the loan-to-deposit ratio (LDR) at 78.4%, compared with 78.7% a year ago. Liquidity is also comfortable, with the all-currency liquidity coverage ratio (LCR) averaging 135.0% in 1H2026 and the net stable funding ratio (NSFR) at 109.0%, both well above the 100.0% regulatory minimum.

Overall, OCBC's credit profile remains strong. Earnings are at record levels and increasingly diversified, and asset quality is sound, with an NPL ratio of 0.9% and NPA coverage of 163.0%. Capital, funding and liquidity also sit comfortably above regulatory requirements. But with CET1 now at management's target level, there is also less excess capital than a year ago. Other key areas to watch are market-sensitive trading and investment income and Greater China real estate exposure.

OCBC's USD Bonds: Solid Credit, Slim Relative Value

Covered bonds provide bondholders with an additional layer of protection compared with ordinary senior unsecured debt. Investors have recourse to both the issuing bank and a dedicated pool of collateral, which generally supports higher credit ratings and tighter spreads. For OCBC, the covered bonds are guaranteed by Red Sail, with the guarantee secured by a pool comprising predominantly Singapore residential mortgage loans.

As shown in Table 1, among covered bonds issued by Singapore banks, the OCBCSP 4.630% 11Sep2029 Corp (USD) yields 5.14% with 2.94 years to maturity. This represents a pickup of 22 bps over comparable US Treasuries. Against its peer, it offers a 4 bps pickup over the DBSSP 4.486% 29Jun2029 Corp (USD), which yields 5.10% and has a similar tenor and the same credit ratings.

Table 1: OCBC USD Covered Bonds Peer Comparison

For subordinated (Tier 2) exposure, as shown in Table 2, the OCBCSP 4.602% 15Jun2032 Corp (USD) yields 5.31%, 97 bps over comparable US Treasuries. The UOBSP 3.863% 07Oct2032 Corp (USD) yields 5.32% with the same credit ratings, so the OCBC bond trades just 1 bp tighter than its peer.

(Note: Tier 2 bonds are subject to loss-absorption and extension (non-call) risks, which investors should be comfortable with before investing. Nevertheless, we believe there is a strong economic incentive for Singapore banks to call and replace Tier 2 bonds at their first call or reset date. This is given their strong access to wholesale funding markets and the progressive amortisation of Tier 2 regulatory capital recognition during the final five years to maturity.)

Table 2: OCBC USD Tier 2 Bonds Peer Comparison

OCBC SGD Perpetuals: Bank-Level Risk at Near-Deposit Yields

As shown in Table 3, OCBC's SGD perpetuals yield between 3.00% and 3.37%, with G-spreads of 111 to 131 bps over comparable Singapore government bonds.

Against UOB, OCBC's SGD perpetuals offer no meaningful pickup. UOB's perpetuals yield between 3.13% and 3.40%, compared with OCBC's 3.00% to 3.37%. Both issuers carry broadly comparable credit ratings, with most issues rated Baa1/BBB+ by Moody's and Fitch. The highest-yielding UOB line, the UOBSP 3.000% Perpetual Corp (SGD) at 3.40%, actually yields 3 bps more than OCBC's best, the OCBCSP 3.200% Perpetual Corp (SGD) at 3.37%. With pricing this close, choosing between the two issuers adds little, and neither offers enough yield to compensate for the risks of perpetuals.

Table 3: OCBC SGD Perpetual Bonds Peer Comparison

Overall, we view OCBC's USD bonds as fairly priced, as they do not offer compelling relative value over peers. Nevertheless, they remain suitable for investors who want high-quality exposure to a strongly capitalised Singapore bank. The covered bond suits those prioritising capital preservation, while the Tier 2 bond offers a modest yield pickup over the covered bonds for investors comfortable with loss-absorption and non-call risks.

By contrast, we do not find OCBC's SGD perpetuals attractive. Yields in the low-3% range give investors little compensation for holding the most junior debt in the bank's capital structure. Perpetuals rank just above ordinary shares, and their coupons are discretionary and non-cumulative, so any skipped payment is lost for good. The bonds can also be written down if OCBC is deemed non-viable. With no maturity date, they may not be called at reset either, leaving investors holding them indefinitely at a possibly lower coupon. Investors seeking exposure to OCBC are better served by its covered or Tier 2 bonds, which rank higher in the capital structure and carry stronger credit ratings.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in OCBCSP 3.900% Perpetual Corp (SGD), OCBCSP 3.200% Perpetual Corp (SGD), UOBSP 2.550% Perpetual Corp (SGD), and UOBSP 4.250% Perpetual Corp (SGD). The analyst who produced this report holds NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.