OCBC's Financial Strength Reaffirmed by Moody's, Bank Takes New Stake in H World Group

In a significant affirmation of financial stability, Moody's Investors Service has underscored the creditworthiness of Oversea-Chinese Banking Corp Ltd (OCBC) by maintaining its ratings across multiple categories. The Singapore-based bank's ratings across long-term (LT) and short-term (ST) foreign currency (FC) and local currency (LC) bank deposits were reaffirmed as Aa1/P-1. This affirmation extends to the bank's Counterparty Risk Ratings (CRR) and Counterparty Risk Assessments in both FC and LC.

In addition to deposit ratings, Moody's also retained OCBC's Aa1 rating for FC senior unsecured debt and its (P)Aa1 rating for FC senior unsecured medium-term note program. The agency further upheld the bank's A2(hyb) rating for FC subordinated debt and (P)A2 rating for FC subordinated medium-term note program.

OCBC's Baa1(hyb) LC preferred stock non-cumulative rating, its (P)Baa1 FC preferred stock non-cumulative medium-term note program rating, and its P-1 FC commercial paper rating and (P)P-1 FC other short term ratings were also sustained. Similarly, the ratings of OCBC Sydney Branch were maintained, with a stable outlook being retained across all applicable categories.

The ratings affirmation is a testament to OCBC's expected stable solvency and liquidity through 2023-2024. Moody's confidence stems from a belief in OCBC's strong public support from the Singapore Government, a factor that contributed to a three-notch uplift above the bank's a1 adjusted Baseline Credit Assessment (BCA).

OCBC's robust financial health is anticipated to persist despite challenging operating conditions in Singapore and its foreign markets. Moody's predicts that the bank's non-performing loans will remain within the 1.0%-1.5% range over the next couple of years, driven by a conservative risk appetite and regional loan diversification.

Despite exposure to the building and construction industry - accounting for 30% of gross loans at the end of 2022 - Moody's notes that the bank's strategy to finance robust real estate companies and state-owned entities should mitigate new impairment. This approach is particularly important given the challenging property markets in mainland China, Hong Kong SAR, China, and certain developed markets.

OCBC's capitalization, one of the highest among Singapore's three major indigenous banks, also contributed to Moody's positive outlook. The bank's CET1 ratio stood at 15.9%, and the tangible common equity / risk weighted assets (TCE ratio) exceeded 20% as of 31 March 2023, showcasing a strong loss-absorption capacity. Without any significant acquisitions in the pipeline, OCBC's capital level is expected to remain steady due to slow organic growth.

OCBC's profitability is also expected to remain steady with a return on assets of around 1.0%-1.1% through 2023-2024. The bank's net interest margin is anticipated to remain stable in 2023, with margin compression expected to start in early 2024. The bank's strong deposit franchise in Singapore and low reliance on market funding, alongside a healthy balance sheet liquidity, further bolsters its financial health.

Notwithstanding the affirmations, Moody's acknowledges that OCBC's ratings could potentially be upgraded or downgraded. The possibility of an upgrade hinges on substantial improvements in macroeconomic conditions in Singapore and Asia at large and a decrease in problem loans. On the contrary, a significant decrease in the bank's core capital due to higher credit costs and risk-weighted assets could lead to a downgrade. A decline in CET1 ratio below 13%, coupled with a weakening real estate market in Singapore and globally, would similarly exert downward pressure on the bank's ratings.

In recent news that further attests to the bank's robust financial positioning, Oversea Chinese Banking CORP Ltd has acquired a new stake in H World Group Limited in the fourth quarter. This stake, representing approximately 0.13% of H World Group, was valued at approximately $18,160,000, according to the company's most recent 13F filing with the Securities and Exchange Commission (SEC). This marks a significant milestone in the bank's strategic growth and diversification efforts.

This development aligns with the moves of other hedge funds. Connor Clark & Lunn Investment Management Ltd., Penserra Capital Management LLC, Brinker Capital Investments LLC, Nuveen Asset Management LLC, and Mitsubishi UFJ Kokusai Asset Management Co. Ltd have all recently modified their holdings of H World Group. These modifications have resulted in the cumulative ownership of 44.79% of the company's stock by hedge funds and other institutional investors, demonstrating a significant vote of confidence in H World Group's prospects.