OCBC: Dividend policy a potential rerating catalyst?
- 3Q25 revenue and net profit beat by 7% and 10% respectively
- Top line beat arose from record quarterly non-interest income; Absence of general provisions during 3Q25 buffered net profit
- Dividend policy a potential rerating catalyst
- Upgrade to BUY with higher TP of SGD19.80
3Q25 revenue and net profit beat. OCBC reported 3Q25 revenue of SGD3,796mn (flat y/y, +7% q/q), while net profit came in at SGD1,978mn (flat y/y, +9% q/q), marking its highest quarterly earnings over last five quarters. Operating expenses rose 4% y/y, 9% q/q to SGD1,519mn, driven by higher staff costs and continued investments in technology, with the cost-to-income ratio slightly higher at 40.0% (2Q25: 39.1%). Capital ratios remained robust, with CET1 at 16.9% (2Q25: 17.0%) and total capital adequacy ratio at 19.4% (2Q25: 19.6%). Net interest income declined to SGD2,226mn (-9% y/y, -2% q/q) as net interest margin (NIM) compressed 8bps q/q to 1.84% driven by a downward repricing of loans from the decline of benchmark rates in SGD and other currencies, where the moderation in loan yields outpaced the reduction in deposit costs, offsetting average asset growth.
Non-interest income record quarterly high, improved on all fronts. Non-interest income reached a record SGD1,570mn (+15% y/y, +24% q/q), lifted by strong fee, trading income and insurance income. Net fees and commissions came in at SGD683mn (+34% y/y, +18% q/q) saw record wealth management fees, growth in loan-related fees and brokerage fees. Trading income of SGD518mn (+2% y/y, +38% q/q) driven by stronger customer flow income and improved investment performance while GEH saw higher contributions at SGD311mn (+34% y/y, +38% q/q).
3Q25 saw higher credit costs of 16bps (2Q25: 12bps) driven by allowances for impaired assets. Total allowances were higher q/q at SGD139mn, 16bps (2Q25: SGD114mn, 12bps) including general allowances (stage 1+2): -SGD1mn, 0bps (2Q25: SGD49mn, 5bps) and specific allowances (stage 3): SGD140mn, 16bps (2Q25: SGD65mn, 7bps). NPL ratio remained unchanged at 0.9%, with allowance coverage improving to 160% (2Q25: 156%).
Management lowered its FY25F NIM guidance and guided for lower credit costs. Management now projects FY25F net interest income to decline by a mid-to-high single-digit percentage (previous: mid-single-digit percentage decline) and expects NIM to moderate to around 1.90% (previous: in the range of 1.90%-1.95%). Meanwhile, credit costs are guided to ease to ~20bps (previous: in the range of 20-25bps). Management maintains its guidance for mid-single-digit loan growth, cost-to-income ratio in the low 40s, a 60% total dividend payout ratio and share buybacks.
Capital and dividends: CET1 at 14% remains as a medium term goal. Management continues to review capital and dividends policy, with the potential for higher payouts as done in the past, though no precise guidance was provided. OCBC will unveil more details towards year-end with the formulation of 3-year planning under the new corporate strategy. Enhancing shareholder returns is a key focus, and management continually reviews payout policy. Management reaffirmed their commitment to delivering good returns to shareholders, noting that there is always upside. Year-to-date, OCBC has conducted SGD 200mn in share buybacks; if the buyback program is not fully completed as planned, there is flexibility to allocate more to dividends. Management will always look at M&A opportunities but recognize that near-term opportunities are limited, though they do look beyond 2-3 years.
Non-Interest Income: Banking AUM growth was driven by SGD 12bn of net new monies in 3Q25, well above previous run rates of SGD4-5 bn, bringing YTD net new monies to SGD21 bn, though 4Q25 is expected to be seasonally lower. All wealth segments saw strong growth, not only private banking, with inflows from Europe into Dubai, along with broad-based inflows into Singapore from regions such as Greater China and Indonesia. Meanwhile, investments-to-AUM ratio continues to grow, standing at 60%, up from the high-50% range in last few years, and is expected to increase further if interest rates decline. GEH saw improved investment performance from both insurance and shareholder funds, along with improvement of NBEV and NBEV margins as GEH has strategic shift towards higher margin products.
Net Interest Income: Management aims to protect NII and wants to grow deposits. Currently, 80% of loans are on a floating rate or due for repricing within one year. The 3Q25 average NIM was 1.84%, with a September exit NIM also at 1.84%, though management noted that maintaining this level into 4Q25 will be challenging. NIM sensitivity based on 100bps decline in rates across 4 currencies is now 11bps on annualized basis (2Q25: 12bps). Management expects Fed rate cuts going forward to flow fully into HIBOR, while continuing to expect SGD rates to soften. Management expect NII to trend lower next year, softening marginally, though decline may not be as sharp as this year.
Loans: The transport, storage, and communications sectors saw the strongest growth, with the bank continuing to capture opportunities in new economy sectors. OCBC grew market share in Singapore mortgages during 3Q25. Meanwhile, sustainable financing grew 17% y/y to SGD55 bn, now representing 17% of group loans.
Asset quality: SPs were primarily related to Hong Kong commercial real estate exposures.
Valuation and recommendation
Upgrade to BUY, TP SGD19.80. We revised our TP on higher ROE expectations, based on the Gordon Growth Model (12.5% ROE [previous:12%], 3% growth, and 10% cost of equity [previous: 11%]). As of 9M25, ROE reached 12.9%. Our TP represents a ~1.4x FY26F, 1 S.D. above OCBC’s historical 12-year average P/BV (one-year forward). We penciled a 0 to +2% earnings revision through FY26F on revised NIM and non-interest income assumptions. We believe a potential re-rating is in the works, should management unveil a clear capital return commentary on a forward looking basis, with upside from the current 50% dividend payout ratio policy. Assuming a flat DPS of S$1.01 through FY26F (FY24: S$1.01), current dividend yield of 5.8% and 1.2x forward P/BV valuation is attractive compared to selected peers.
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