Surprise US fed cut to weigh on OCBC's NIM

FY2020F NIM could dip below 1.70%.

OCBC is headed towards further net interest margin (NIM) downside on the back of the US Federal Reserve cutting its interest, reports DBS Group Research.

The US Federal Reserve announced a 50 bp interest rate cut in an emergency move on 3 March.

The lower reference rate would lead loan yields to continue to decline, according to DBS analyst Rui Wen Lim. OCBC’s net interest growth is also expected to soften as loan growth weakens
amidst NIM pressures, on the back of economic slowdowns in key markets.

Although OCBC has already guided for NIM to remain above the 1.70% level posted in FY2018, the recent rate cuts of both US and Hong Kong will likely drive NIM lower, Lim added.

For now, OCBC’s FY2020F NIM assumptions have been revised down by c.-1bps, with NIM expected to come at 1.71%.

However, the bank’s non-interest income franchise could lead to potential upsides. “OCBC differentiates itself from peers in terms of its non-interest income composition. Its focus is on growing its non-interest income franchise, especially its wealth management business,” noted Lim.

OCBC’s wealth management income has been steadily growing since its acquisition of the Bank of Singapore, and this trend is expected to be sustainable. Its acquisition of the wealth and investment business of Barclays Bank in Singapore and Hong Kong in December 2016 added $18.01b (US$13b) to the bank’s assets under management.

“We see the wealth management income line as the key indicator to watch for sustained synergies in OCBC Wing Hang,” said Lim.

Further regionalisation could also improve OCBC’s operating performance. Malaysia remains as the bank’s second largest contributor, and its edge lies in its Islamic banking franchise, according to Lim.