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OCBC to remain strong and stable through 2024: Moody’s

Asset quality and nonperforming loans will likely remain between 1% to 1.5% in 2023-2024. 

OCBC is expected to retain its strong and largely stable solvency and liquidity through 2024, according to a commentary by Moody’s Investors Service. Profitability will remain largely stable at around 1% to 1.1% between 2023 and 2024.

“Moody's expects net interest margin to remain mostly stable in 2023 because interest rates increases have almost peaked, and margin compression will start in early 2024,” the ratings agency said in its latest ratings report of OCBC.

“The bank's funding benefits from its strong and sticky deposit franchise in Singapore, and low reliance on market funding. Balance sheet liquidity is strong, with a large share of high-quality liquid assets,” it added.

Asset quality and nonperforming loans will likely remain between 1% to 1.5% in 2023-2024, driven by a conservative risk appetite and regional loan diversification. 

 Absent any large acquisitions by OCBC, the capital level will remain steady in 2023-2024 because of slow organic growth, Moody’s said. OCBC is the best capitalized bank amongst Singapore’s big three, with a CET1 ratio at 15.9% and tangible common equity/risk weighted assets (TCE ratio) more than 20% as of 31 March. This capitalization provides ample loss-absorption capacity, according to Moody’s.

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OCBC is further expected to maintain its good provisioning buffer over the next couple of year despite muted operating conditions in Singapore and its foreign markets.

One key credit risk for the bank, however, is its large exposure to the building and construction industry. Loans to this industry make up 30% of OCBC’s gross loans as of 2022.

“Although a large share of the real estate loans are lent out for investments and projects in Singapore where Moody's expects relatively stable credit quality and liquidity conditions, however, the bank is also exposed to the challenging property markets of mainland China, Hong Kong SAR, China, and some developed markets, where some credit impairment is likely despite the good loan quality so far,” Moody’s said.

The Singaporean bank is also expected to receive very strong public support from the government in case of need.

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“Nevertheless, OCBC's strategy to mainly finance strong real estate companies and state-owned entities means that new impairment should be relatively muted,” it said.

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