UOB Kay Hian
August 4, 2025

OCBC 2Q25 Results: Navigating Margin Compression with Growth in Fee Income and Resilient Asset Quality

Overview: New Leadership, New Momentum at OCBC

Oversea-Chinese Banking Corporation (OCBC) continues to demonstrate its resilience and growth potential in a challenging macroeconomic environment. With a strong foothold in Singapore and Malaysia, expanding influence in Greater China, and a commanding presence in life insurance and wealth management, OCBC is navigating through interest rate headwinds and market volatility with a strategic focus on fee income, cost discipline, and capital returns.

Key Highlights and Broker Call

Broker Recommendation: BUY (Maintained)
Target Price: S$20.15 (Upside: 18.9%)
Share Price (as of report): S$16.23
Dividend Yield (2025F): 5.8%
Market Capitalization: S$75.5 billion

2Q25 Earnings Snapshot: Resilient Performance Amid NIM Pressure

OCBC reported a net profit of S$1,816 million for 2Q25, representing a 7% year-on-year and 4% quarter-on-quarter decline. Despite net interest income dropping 6% year-on-year due to a sharp 28 basis points (bp) contraction in net interest margin (NIM) to 1.92%, the results came in slightly above expectations. The margin squeeze stemmed from a steep fall in benchmark rates—3M Compounded SORA declined 50 bp, and 3M HIBOR plummeted 220 bp—impacting SGD and HKD loan yields.

Key 2Q25 Financials

Fee Income and Wealth Management: Powerful Growth Drivers

OCBC’s fee income surged 24% year-on-year in 2Q25, with significant contributions from wealth management, which itself jumped 32%. The bank’s assets under management (AUM) hit a record S$310 billion, buoyed by S$4 billion in net new money inflows and favorable market valuations. The rebound in market sentiment after April’s dip fueled strong momentum in May and June.
Trading income also expanded 6% year-on-year to S$375 million, primarily driven by increased customer flow treasury income (+9% yoy) across wealth and corporate segments.

Expense Management and Efficiency

OCBC maintained tight cost control, with operating expenses up just 1% year-on-year. Staff cost increases were limited to 3%. The cost-to-income ratio remains healthy at 39.1%, reflecting the bank’s ongoing focus on operating efficiency.

Asset Quality and Provisions: Conservative and Prudent

OCBC’s asset quality remains robust, with the NPL ratio unchanged at 0.9%. Most new NPLs in consumer banking (S$130 million for 1H25) were due to a few private banking clients, and there is potential for these exposures to be upgraded. Total provisions were S$114 million (credit cost: 12bp), a decrease from the prior quarter, and loan loss coverage remains high at 156%.

Capital Management: Commitment to Shareholder Returns

OCBC reiterated its commitment to return S$2.5 billion to shareholders through a mix of special dividends (equal to 10% of 2024 and 2025 group net profit) and S$1 billion in share buybacks over 2025 and 2026.

Key Financials At-a-Glance

Rock Solid Balance Sheet and Capital Adequacy

OCBC’s CET-1 capital adequacy ratio (CAR) remains robust at 15.3% under fully-phased Basel III reforms, dropping to a pro forma 14.6% after accounting for the 1H25 interim dividend. The bank’s financial strength is further underpinned by a loan loss coverage ratio of 156% and a loan-to-deposit ratio of 78.7%, reflecting prudent liquidity management.

Guidance and Outlook: Navigating Headwinds and Opportunities

Loan Growth: Mid-single-digit for 2025.
Cost-to-Income Ratio: Expected at low 40% range.
Credit Costs: 20-25 bp.
Dividend Payout: 60% of full-year net profit (50% regular, 10% special).
NIM Guidance for 2025: Lowered to 1.90%-1.95% (from 2.00%), factoring in three expected rate cuts in 2H25.
Net Interest Income: Projected to decline by mid-single-digit percentage, with volume growth offsetting margin compression.
OCBC’s direct exposure to vulnerable sectors reliant on the US market is manageable, with manufacturing, international transport & logistics, and metals & mining accounting for just 3% of the total loan book. Two-thirds of the loan book is domestically focused, mitigating first-order tariff impacts.

Leadership Transition: New CEO Ushers Strategic Continuity

Incoming CEO Tan Teck Long, effective January 1, 2026, brings a balanced background in both business development and risk management. He aims to further OCBC’s One Group strategy, strengthen organic growth in corporate and retail segments, and explore value-accretive inorganic opportunities.

Earnings Revision and Valuation

Net profit forecasts have been raised by 2.4% for 2025 and 1.5% for 2026, reflecting slightly lower NIM and moderating credit costs.
The target price of S$20.15 is based on 1.44x 2026F P/B, using a Gordon Growth Model (ROE: 12.3%, COE: 8.5%, growth: 0%).

Key Assumptions Table

Conclusion: OCBC Well-Positioned for the Next Phase

Despite near-term NIM pressures and global macro uncertainties, OCBC’s diversified income streams, disciplined cost management, resilient asset quality, and robust capital position underscore its ability to deliver sustainable value to shareholders. The strategic transition in leadership reaffirms continuity and a focus on both organic and inorganic growth opportunities. With a compelling 2025 dividend yield and a clear capital return roadmap, OCBC stands out as a solid pick for investors seeking stability and growth in the regional banking sector.