Good morning, everyone. Anyway, thank you for joining us this morning to OCBC's second quarter and first half results briefing. On our panel this morning, we have Helen Wong, our Group CEO, Darren Tan, our Group CFO, Mr. Tan Teck Long, our Head of Global Wholesale Banking. We have Mr. Kenneth Lai, which is our Head of Global Treasury, and of course, Sunny Quek, who is our Head of Consumer Financial Services Singapore. We will have Darren going through the slides with us. If you don't have it, you can do the QR code, but I'm sure you guys all have a copy of it. After that, we will take Q&A. All right. To you, Darren.
All right. Thank you, Ching Ching. Okay, good morning. Thank you for joining us, physically and virtually as well. I will start with slide four in terms of our results, covering the first half of 2022. As you can see on the slide itself, first half 2022 net profit was a new high of SGD 2.84 billion. It's an increase of 7% as compared to the year before. Total income was 1% higher year-on-year. Net interest income grew 10% from rising interest rate as well as the continued asset growth in our balance sheet. This was offset by a 10% decline in non-interest income as compared to the high base a year ago. Net interest margin improved 6 basis points to 1.63% for the half year.
Customer loans and deposits grew by 8% and 10% respectively. Expenses were higher by 7% as we continue to invest in talent and digital capabilities. With a comparatively better economic environment, less allowances constituting 7 basis points of credit costs were also set aside. The NPL ratio consequently were also lower at 1.3%. Capital remains strong at 14.9%. The board had approved an interim dividend of SGD 0.28 per share, SGD 0.03 or 12% higher as compared to the 2021 interim dividend. On slide five, you'll notice that the diversified earnings from our three business pillars continue to deliver robust performance. Net profit for our banking operations for the quarter rose 29% from a year ago and 6% from the previous quarter. Wealth management income was also higher for the quarter across both banking and insurance.
The group's wealth management AUM was fairly stable quarter-on-quarter, and this is despite lower market valuation. Our insurance business continued to register healthy business growth. Net profit contribution to the group for the quarter was SGD 237 million, an increase of 23% from last year and 30% as compared to the previous quarter. On slide six, you'll notice that essentially our operations remain well diversified both across businesses and geographies. This diversification, coupled with our strong capital position, had enabled us to generate resilient performances through the various economic cycles. Now moving on to slide nine, in terms of the detail of our group performance, the group first half 2022 net profit of SGD 2.84 billion was 7% higher year-over-year, mainly driven by an increase in net interest income and lower allowances.
This more than offset a decline in non-interest income and the modest rise in operating expenses. Now on slide 10, you will notice that for the second quarter, net profit rose 20% year-on-year to SGD 1.48 billion, mainly from higher interest income and lower allowances. If you were to compare it versus the previous quarter, net profit was also higher by 9% from higher interest income. More details will be covered from slide 14 onwards. Now if I can go on to the net interest income. You'll notice that, net interest income rose to a new high of SGD 1.7 billion. That's on slide 14. This is 16% higher year-on-year and 13% higher quarter-on-quarter.
This rose in interest rate and interest income was against the backdrop of a higher, you know, sort of, interest rate hike for this year. Our net interest margin consequently expanded strongly by 13 basis points year-on-year and 16 basis points quarter-on-quarter. Now in terms of non-interest income for the second quarter, it was SGD 1.18 billion, and this up 6% as compared to the year before, but and also, you know, sort of, above the previous quarter. Higher trading income and life insurance profit more than offset the lower fee and investment income. Obviously, if you compare against last year, the comparative would be lower. Now in terms of slide 16, you will notice that for fee income for the second quarter 2022 was softer at SGD 477 million.
Investment sentiments, as we know, remain subdued, so our financial markets dependent fee income, such as wealth management, brokerage, and investment banking were weaker compared to the previous year as well as the last quarter. On the other hand, loans and trade-related fee income rose for the quarter on higher economic activities. Credit card fee also increased with the broader resumption in terms of consumption activities. I'll move on to slide 18. Operating expenses for the second quarter rose modestly by 10% year-on-year and 4% quarter-on-quarter. The year-on-year increase was largely attributable to higher staff costs from salary increments and growth in talent across our business and support function. To a certain extent, we continue to invest in technology, while business promotion expenses also rose in tandem with the higher business activity.
Now given strong income growth, you will notice that our cost-income ratio consequently improved to 43.5% for the quarter. In terms of allowances on slide 19, total allowances for the quarter was SGD 702 million, and this amounted to a credit cost of 8 basis points. The allowances set aside for this quarter comprises mainly ECL one and two allowances for non-impaired assets of SGD 66 million after adjusting for macroeconomic variable updates. Now, in terms of cumulative allowances, they remain relatively unchanged at SGD 3.9 billion, with the decline in the non-performing asset that I will cover later. Our coverage ratio for our NPA increased to 99% for this quarter. On slide 21, you will notice that our loan book remained healthy with NPL ratio trending lower to 1.3%.
NPA was SGD 4.0 billion, SGD 3.969 billion, you know, essentially a decline of 8% from the previous quarter, driven essentially by higher recoveries and upgrades for the quarter. You will notice on slide 22, new NPA formation for the quarter was relatively low, SGD 182 million, lower compared versus last year and last quarter. Recoveries and upgrades were higher at SGD 419 million across both the corporate and consumer segment. This includes recoveries from the NPLs that were previously recorded in the oil and gas space. Moving on to slide 23. Our loans grew 8% to SGD 298 billion from SGD 275 billion a year ago, led by growth in our core market of Singapore, Indonesia, Greater China, and also from our international network such as the U.S. and the U.K.
Now by industry, the year-on-year increase was driven by loans to the building and construction sector, and also by the general commerce sector, and also include consumer lending, in this case, our mortgages. Our loan portfolio remained well-diversified, with building and construction and housing sector remaining as the largest segment at 29% and 21% of total loans respectively. Moving on to slide 24. Customer deposits grew 10% from a year ago to SGD 349 billion, with CASA ratio at about 61%. For the quarter, we had witnessed some shift of CASA balances to higher yielding fixed deposit. However, liquidity remained ample with LDR of 84.4%, and we continue to be in a strong position to support further business growth. Moving on to slide 25. Our capital position remains strong with common equity tier one ratio of 14.9%.
The decline in the CET1 ratio for the quarter came from the payment of our full year 2021 dividend, higher operating RWA requirement as imposed by our regulator, and also a decline in terms of the fair value reserves of our debt securities as a result of the higher interest rate. In total, the board had proposed an interim dividend of SGD 0.28 per share, and this represented a payout ratio of 44% against our core group net profit for the first half of 2022. Now with this, I will pass the floor to Helen. Thank you.
Thank you, Darren, and good morning, everyone. It's always a pleasure to be seeing everyone physically. Good morning also to those who joined us online. As stated by Darren, I think our first half results is good with a net profit at a new high. Despite the challenging environment, the performance across our three business pillars, namely banking, insurance and wealth management, reflected the strength of our resilient franchise. This is demonstrated by our second quarter's performance, which continued to build on our first quarter results. Just to recap some of the things that Darren reported. We achieved double-digit NII growth. We have a strong rise in NIM, which crossed 1.7% as a well-positioned balance sheet benefited from rising rates.
We have a wealth management income up and grew net new money flows despite cautious investment sentiments. This is across our premier and private banking segments. We have new insurance sales and which looks really healthy in the second quarter. We sustain positive momentum in our loan and deposit growth. Indeed, asset quality remains healthy. We achieved a single-digit credit cost for the first half, and NPA ratio also declined to 1.3%. We also maintained a strong capital base, funding and equity positions. We declared an interim dividend of SGD 0.28, which is a rise from the first half of a year ago, and this is in line with our dividend policy going on sustainable and progressive.
I have shared two slides, which I'll just talk a little bit more in details. I think the growth in Asia should remains positive. We expect continued economic growth, but perhaps at a slower pace in the second half of the year. Singapore particular resilient. We see economic activities rebound. It is very important to us because Singapore is our home base. We see the regional ASEAN markets on steadier recovery plan this year. Higher commodity prices also benefit Malaysia and Indonesia, the other two core markets of ours in ASEAN. The employment picture broadly is firm in our markets with a tight labor market. Indeed, we see recovery in travel and domestic demand following lifting of restrictions and border reopenings.
This is particularly so in Singapore as we actually see more visitors passing through, either doing business here or reach out to the other parts of the world. Chinese government will continue to boost infrastructure spending and stepping up prudent monetary policy to support growth. We also look forward to further normalization of movement curbs. Having said that, of course, we stay cautious on near-term headwinds in our operating environment. I think I cannot miss out the Russia-Ukraine war worsening strains in the global supply chain, and this also heats up inflationary pressures with negative consequences on the overall global economy. Monetary tightening induced recession risks also rising in key developed markets. Recession, though, is not on the cards for Singapore in this juncture.
If credit cycle turns in part from rising interest rates and slowing economic growth, this may put pressure on debt servicing abilities of businesses and consumers. We remain also watchful of any public health concern from any new COVID-19 variants. Turning to the slide on looking forward, I think we're positive on our full-year 2022 outlook. We will continue to see NII upside with rate hikes and also repricing of our loan book. I may also see some shift from CASA to fixed deposits. Good chance full-year NIM will end above 1.7%. Higher NII should also offset the weaker capital markets-dependent fees, like wealth management, as consumers are more risk-off, expected to continue into the second half of the year.
We are advancing on our strategic priority of growing wealth management business and also excited on where it is heading long term. Just take an example. Our private banking arm expanded regional coverage through the opening of Bank of Singapore or BOS Wealth Management Malaysia. Malaysia is the first market after Singapore to have comprehensive onshore presence for our private bank business. Loans grew 3% year- to- date. We are on track for mid-single digit growth for the full year. We, of course, maintaining discipline on the discretionary spending. We're deepening our talent pool and also our technology capabilities to drive business growth and meet customer needs at each stage of their journey with us.
I do want to spend a little bit more time on talking about how we proactively monitor our loan portfolio, and meanwhile, our asset quality remains resilient. Indeed, we are closely watching ongoing market concerns on China's property sector. Our total onshore China loans comprise only about 2% of our total loan book. The portfolio is of good quality. Approximately 1/3 of these are real estate loans and mainly to large conglomerates, corporates, and SOEs, including very strong network customers continue to do their business in China. We do stress tests on our credit portfolio across a broad variety of macroeconomic factors, such as a prolonged war dragging down global economic recovery with further resurgence of the pandemic.
Other factors also include the sharper than expected tightening of monetary policies by central banks, real estate defaults, significant declines in GDP growth, property market prices and global market valuations, et cetera, and also sharper rise in interest rates, unemployment, and commodity prices. With all these factors put into our stress tests, happy to report that we do not see structural concerns so far, and we're comfortable with our quality of the book. Credit costs expected to be on the low end of our guidance. Potentially, if current market conditions prevail, could have some improvement further. NPA ratio coverage is also nearly at 100%. We also like to report that we further intensify our sustainability efforts.
ESG continues to be a very big factor on how we actually drive our business as is one of our growth pillars in our strategy. We're making good progress towards our goal of SGD 50 billion on book by 2025. Our sustainable financing commitments grew to SGD 37 billion as at June this year. We're committed to achieve carbon neutrality in our operational emissions in 2022. This is on track. We announced in May that we will also invest more than SGD 25 million in decarbonization efforts in Singapore, Malaysia, and Greater China. Our wealth sponsorship, we are sponsoring innovative sustainability-related solutions in the region. We launched our inaugural OCBC Sustainability Innovation Challenge in June.
Just to conclude, just want to announce that we will mark our ninetieth anniversary in October this year in OCBC. We're proud of our heritage and the value OCBC has created for our stakeholders over the last nine decades. We're going to celebrate this milestone by giving back to our community through environmental conservation projects and also employee volunteering. Thank you very much. I think we'll now move on to take any questions you may have. Over to you, Colin.
Oh, I think Nick.
Yeah. Sorry.
Thank you. Thank you very much, for the opportunity to ask a question.
Good morning.
Congratulations on the strong set of results. Could we talk a little bit about net interest margin? I mean 17 basis points move Q-on-Q is a big move. I think your peer as reported did 9 basis points. And it takes you to within about 8 basis points of your quarterly peak pre-COVID. And obviously interest rates have only really reached sort of those pre-COVID levels in the last sort of week or so. I'm just trying to understand how you saw such a big loan repricing in the quarter, what drove that? If you could give us indication of what type of loans, and can you know. I mean, does this mean that we're gonna end up being substantially higher than sort of previous guidance in terms of sensitivity for sort of 2023 then?
I think I'll have Darren go into a bit more details. I do want to mention that over the last low interest rate cycle, we continue to grow our book. The loan book has grown and also deposits and the percentage of CASA has also grown as well. I think that lay a foundation to capture the rise in interest rate when the opportunity finally arrives. Darren?
Yeah. Nick, thanks for your question. I would say that we are also pleasantly surprised by the move, in terms of the improvement in terms of net interest margin. Now, if I can answer that, response to the improvement in NIMs, from the asset liability management angle. Now, if you look at our asset, less so the loan pricing, but more so that our asset more than 8% are priced, to some form of, market rates. If you were to look at the, market rates, movement, substantially fair bit of the increase in terms of, SIBOR saw, more than 100 basis point actually took place, during the second quarter. We see a upward revision in terms of, interest rate on our asset side.
If you move on to the liability, you would notice in the presentation where we talk about a deposit, the CASA component for our funding is an area that we have been focusing on. You know, systematically, ALCO has been essentially building up on the current accounts and savings account across the balance sheet. Even if you notice that there is a movement to a fixed deposit, our CASA ratio remains relatively high at about 60%, 60.9%, you know. The upward adjustment in the market rate, which happened on the asset side, has not really, you know, sort of transferred completely to the deposit side now.
Which is why in a way, you know, the improvement in terms of the net interest margin was the amount that we talk about, 10 basis points, and a surprise on the upside. To some extent, in a way when we calibrate the balance sheet, we are also hoping when there is an adjustment in terms of the interest rate, the asset side would move faster than the liability. Now obviously, your follow-on question is, would we see a similar magnitude? I mean, we would hope to, but the reality is that, you know, it's probably less of an increase of this magnitude.
The reason is because as you notice in our report, in terms of our deposit itself, there's already movement to fixed deposit and there are competition in terms of, increases in terms of, deposit costs, essentially offered by our competitors as well. So we do have to also match with some of this, competition. Which means that even though there could be some follow-through in terms of the rates to our asset side, there would be increase in amount in terms of the follow-through on the liability side. Having said that, we do think that there could be some upside still to our net interest margin for the rest of the year, but the magnitude may not be the same amount that we saw this quarter.
Can you give us an indication? I mean, obviously rates move during the quarter and they move particularly at the end of the quarter. Can you give us an indication of sort of what your exit NIM was for Q2 or your June NIM or whatever?
Yeah. Our exit NIM for Q2 is about 1.71%, you know, ish level. I, you know, maybe just to respond to what we kind of guesstimate the likely exit NIM for us by the end of the year is gonna be slightly more than 1.8%. Having said that, against, you know, the velocity and the speed of the movement by the central bank and the extent of its passing through the market we're in itself, is something that we're hopeful that potentially it might be higher. I mean, we noted that there are, you know, sort of guidance higher than what we have just guided. If indeed that is the case and it flow through to us as well, you know, all the better. Nick.
The exit NIM was the same as the quarterly NIM?
Yeah, roughly.
Okay.
Yeah.
It was the same throughout the quarter?
Yeah.
Yeah. Okay. Thank you.
Okay. Just pass to Chew from Zaobao.
Hello. I have a question regarding for the SME funding. May I know how is rising interest rate impact to the SME funding demand, and would this increase their funding costs? How do you see any more distressed asset and NPL ratio for this particular segment? Thank you.
The SME business obviously relies a lot on economic recovery and activity. In the bigger number of our core markets where we're active with the SMEs, I think business has recovered quite a bit as economic growth continue to increase this year. Of course, with interest rate rising, funding rate will be rising as well. It's important to see what sector they are in and how they actually continue to do their business. I still feel we still look at that economic growth is more beneficial at this point of time. Of course, we continue to support the SME as they also include increase in their business activities as well.
At this point of time, we do not see the quality of that SME book actually getting worse. Again, as I said earlier on, we'll continue to be watchful on how things may evolve in the second half of the year.
Okay. Thank you for taking my questions, and well done on a very strong quarter. This is Jayden from Macquarie. I have a question around asset quality and some of the comments that you made, Helen, on the stress test. You indicated that you tested for many various sort of things that are happening, and it looks like during the quarter you left the ECL one and two as largely flat, right? Should we infer that the current sort of overlays are sufficient to sort of factor in all of those potential points of volatility that you see?
The reason why I ask is because the guidance seems to infer that the second half we would see a credit charge around 30 basis points. It just mathematically based on the guidance of 20, though you did say it might come slightly better. Just wanna understand if there's a need to build any more overlays or if the current overlays are sufficient, and what that might do for some of the sensitivity on the credit charge. Thank you.
I think, when we talk about ECL changes, actually there are some upgrades in facility grades for the portfolio, but we also have put on overlays. For one example, the Chinese real estate just overall sector, we added our overlay on ECL. So, it is a movement of in and out. But of course, we do look at quarterly at our MEVs, and we look at the environment, the economic growth environment, and also interest rate environment as well. So, if we said we, how we actually look at the second quarter, we have done what we think is required, is this enough.
For the second half of the year, I do think that we potentially will have improvements. Again, we do know the headwinds are there. We do know that inflationary pressure continues to be there. Again, as I said, it is not worse than first half of the year. Of course, we expect to see some improvements. We will continue to review on a quarterly basis.
Hi. Thanks for the opportunity to ask question. This is Harsh Modi from J.P. Morgan. I had three questions. First, a bit more details on China real estate exposure. Did I get the numbers right? That total onshore loans is 2% of loan books, so say about SGD 6 billion, and 1/3 is real estate, so only SGD 2 billion is China real estate total exposure. Is that correct number?
2% of our loan book, that would be 60%. Yes, that's right. Your calculation is correct.
Okay.
And then 1/3 is real estate. Yeah.
Okay. Out of that SGD 2 billion, could you give some breakdown of how much is state-owned Chinese developers? How many are network customers or, let's say, the Singaporean or large regional developers developing in China? And how much are privately owned Chinese developers out of that?
Okay. The network customers would be above half of that. The rest would mainly be SOEs. POEs is very small.
Great. Thanks for that. Second is on going back to the credit cost guidance, 30 basis points in second half, is it conservative or you are just keeping a bit of margin of safety on your side, so in case things go bad? Otherwise, if current trends persist, there is a possibility you may not have to provide up to 20 basis points for full years. Is that a fair assessment?
That is a fair assessment.
Okay. Thanks. The final one, on some of the comments on margins, ALM that Darren talked about, yes, there has been a lot of floating rate loans, but is it possible and what can you do over the next six to 12 months to lock in some of the asset yields? Because at some point in time, rates probably will peak. What are you doing right now, and how are you thinking about next 12 months on locking in some of these high rates? Thank you.
Floating rates or fixed rate is also subject to demand from the customer base and also subject to competition as well. At the moment it does work because we continue to reprice according to interest rates rising. On fixed rate demand, you do know that the corporate book generally do not lock in, but there are always chances for the corporates as well to lock in through interest rate swaps. On the consumer book, there is always demand on shorter term fixed rate. Recently we also see shifting of fixed rate to floating rates because our fixed rates become actually on a higher magnitude to a lot of the mortgage loans.
I think we will price accordingly, but the demand from customer base is still a guiding force in that.
Hi, Faris from Bloomberg. Just a couple of questions. The first is when you raise, you know, a caution on recessionary risk. I'm just wondering that, you know, for the other markets under your portfolio, which markets do you see higher recessionary risk or possible recession even setting in? Second question is on the China loan book. Quite positive on that in terms of the quality of your loans in China. Is there a concern given, you know, the property market woes, mortgage boycotts? You know, is there a concern that, you know, things may take a turn for the worst and like, you know, is there any guidance on like the frequency of your stress tests with regards specifically to the Chinese loans?
Okay. I think the first one is regarding inflationary risk. For our core markets, we do not see the chance of it looming really high for our core markets in the second half. We have to look at the global markets, more the U.S. and also Western countries, because it does have a big impact on the commodity prices eventually affecting supply chain. A lot of our business of course in this market is on trade, an investment flow. I think when we say we want to caution on inflation risk, because it is all linked. I think that would be hopefully answer your question.
The second one on the real estate markets, in particular for China, as we did say, there is a lot of uncertainties over there. I think recent news about mortgage boycott doesn't help. Also there are news about China taking a look at potentially setting up funds to address and to help some of the uncompleted projects. As I said, our exposure in China to the POEs is very low. The quality of the book for the rest of the portfolio, we're quite happy with. Indeed, when you say talking about stress tests, we do that very frequently. Definitely real estate is one of the factors that we measure all the time. As I said, we're quite happy.
We're watchful, but that's why I did say that, we do put in a bit more overlay in the second quarter for China's real estate market, just to reflect that we are indeed exposed there. Having said that, we're still thinking that our quality of the book is quite resilient.
Okay. Thank you. We'll move over to questions on Zoom. First one will be Yafei from Citibank.
Hi. Thank you for taking my question, Helen. I have two if I may. The first one is on the asset quality, slide 21. We see that the Greater China part of the NPL, there has been a gradual increase over the past few quarters. Is it all related to-
Hold on. Can you repeat the question from the beginning?
China CRE? Hello? Can you hear me?
Yes, we can.
Yeah. So that's the first question. Then also, would it be possible to give us an indication what is the current allowance that you have made related to that SGD 2 billion China CRE portfolio? So that's the first question. Then-
Yafei, we missed out on the first question. Maybe, could you repeat it again, please?
Yeah, sure. The first question is related to the slide 21 on the breakdown of NPLs across different regions. You can see that in the Greater China region, there has been a gradual increase in that NPL over last few quarters. Just wanted to understand, is China CRE the main driver for that increase? Along with that, it would be possible to give us what is the current allowance that you have taken related to the China CRE sector? So that's the first one on asset quality. The second one on expenses, there is quite a lot of inflationary pressure across the board. Expenses actually increased about 10% year-on-year. Are you able to give us some flavor, you know, what are the investment plans and what is the cost inflation pressure you are seeing? Any cost guidance for this year and next would be great. Thank you.
Okay. Thank you for that, for these questions. The first one regarding the NPLs and Greater China, Greater China NPLs are rising. That is, we have a bit of real estate there, but the rise is based on due to other industries. You may remember last year we did reported some of the syndicated financing into certain infrastructure projects, actually has generated a bit more NPLs. The increase in this quarter is not really CRE related.
I think we don't disclose detailed numbers in allowances in the real estate book, but if you do look at that SGD 630 million, the real estate is not a high portion of it. The second question's on inflationary pressure, and indeed how does that actually lead to our costs and what are the things that we're invested into. Very importantly, we're investing into our talent pool. We continue to hire where there's a need. The second quarter already reflected the increase in salary for the pool of our employees.
We expect we'll continue to invest a bit more into technology, which is important, as we continue to use that investments into a few things. The first one, very importantly, is how we deal with our customers. Investment in technologies have yield very good results to date, when a lot of our SMEs and our consumer opening account is really online. This year, first half of the year, for example, 99% of SME opening account with us is actually online. About 70% of our consumers opened an account with us online. Transactions are indeed done online, actually well over 50%, or actually over 60%. I think this investment is very important on this.
The second thing is preparing ourselves for the future. As we continue to link up our markets. In our corporate strategy, we talk about being one group very much focused on the trade flows, the investment flows, and the wealth management flows within Asia. It is important that we are able to serve our customers on the regional basis, be they corporates or are they high net worth individuals that invest in different markets. We have our two hubs in Hong Kong and Singapore, but indeed linking the other core markets, Malaysia, Indonesia, to get an overall proposition to our customers is very important.
Chanya from Bloomberg.
Hi, this is Chanyaporn Chanjaroen. Helen, congrats on the numbers. I have two questions. The first one, are you looking to expand your loan book in Greater China, especially in the property sector? Second question, are you raising interest rates in Singapore for deposits?
Thank you. Greater China is a core market of ours, and indeed, as we continue our business there, we will expand our loan book. When we say we expand our loan book, of course, we can afford to be selective. Greater China, in a way, is not just mainland China. We also continue our business, we have a good presence in Hong Kong. Indeed, there are high-quality real estate names that we'll continue to bank with. In particular, some of them have actually our network customers. As they continue to look overseas, for example, in the U.K. and Australia, we'll continue to support them. Yes, the answer is yes, we'll expand.
Of course, credit quality and how we actually view the relationship with our customers remain to be what we call our day-to-day BAU practices. As to raising deposit rates, I think that Darren mentioned that a little bit. Indeed we need to meet competition. I just wonder, maybe just call upon Sunny to give a bit of view on the consumer market in Singapore.
Yeah. Given the current interest rate environment, we are definitely looking at that. We have plans to do so, and we'll share accordingly. For our fixed deposit, we have been increasing our interest rate to be in line with our competitors.
David?
Morning. David Lum from Daiwa. I have a question on your recoveries and upgrades. They're much higher than your new NPL formation. Clearly this is not a sustainable situation. Can you provide more color on why this situation occurred in the first half and second quarter, and when do you think it will normalize, going forward? Thank you.
Thank you for that question. The recoveries are indeed related to a few specific counterparties or customers. Yes, you don't see that every quarter. That is the reason why we think the second half of the year will normalize a bit more. That's why we are not projecting a single-digit credit cost for the whole year. I hope that answers your question.
Melissa?
Hi. Thank you. This is Melissa from Goldman Sachs. Just in terms of China back again on the NPL rise, you said it wasn't really due to the real estate. Are you expecting some perhaps to fall in there? Just to check, double-check, do you have mortgages in China? I remember you do have some in Macau, right? Is that really just it? Also in terms of the insurance income was really strong this quarter. I just wanted to understand a little bit more. Was it the repricing, or the interest rates go up so that guarantee rates are a bit high and you've been able to do a little bit more? Is this number that you have printed in the second quarter sustainable over the next couple of quarters? Yeah, that's about it.
I think the third one is related back to NIM. I didn't catch the first part of your third question. Darren can handle that. Sorry. The first one regarding NPLs in the Greater China book, I did say the bulk of it is not real estate. Yes, we do have real estate exposure that we actually call NPL, but that is not substantial. Okay? You have to think back about our total book. As we said, overall onshore China is just 2% of our book. Ultimately, no matter how you look at it, that exposure is very much manageable. Do we have mortgages in China? We do.
A small portfolio, but it is predominantly in Shanghai and in the Pearl River Delta. This, for most of them, they are on the existing properties, so it is not uncompleted projects. We have some, because if you are in this market, you are. We do not see for our portfolio affected by some of the mortgage boycott, which appears in a lot of the tier three or tier four cities in China. Indeed, the LTV is particularly low for this portfolio. It's actually around 20% at the moment, at the point of time, as at end of June. We're pretty comfortable with this portfolio, but it is indeed a very small portfolio. Yeah.
Melissa, on the question pertaining to insurance, again, it's an asset-liability, you know, sort of a discussion. If I may simplify the you know sort of business driver into three main category, right? The operating performance, operating profit is where you. Your second question pertaining to how sustainable that this you know sort of P&L will be. The operating part of it would be sustainable. It's a function of how much how many policy you sell and how much of the net business and beta value you add to your embedded value. In that sense, as long as policy increases, you know, the natural operating profit in terms of premium versus the difference between premium versus claims will mean that it translates to higher operating profit on that part.
Now, the other part is shareholders funds, where you see some volatility, right? Shareholders funds typically would have a investment component coming into play, and that would involve in, to some extent, more investment into equity. Which is why if you look at the performance, therein, you see that underperformance pertaining to, you know, shareholders funds, mainly because of the adjustment in equity market. Then the next question is operating or the non-operating, part of it. It's very much related to the non-participating, the ALM, the equation that we talk about. Whereby essentially involve asset allocation, whereby you invest asset combination, mostly of bonds and equity, and the liability is guaranteed to move in tandem with, long end interest rate.
What happens here is that essentially long-term interest rate, as you know, has been rising until recently. Because the way for accounting for this non-operating profit will take a lag in the sense that it's not unlike the bank, where the asset is adjusted based on market rate and it adjusts automatically. Whereas on the insurance side, it's very much an actuarial exercise. In terms of the adjustment to the liability, it took place for this quarter. Hence, you see that, you know, sort of a relative performance whereby asset, even though has not done as well as, you know, the market, but the liability adjusted more, hence the performance. That part of it is more volatile.
I think it's important to look past all this volatility in the insurance business and note that as long as policies are growing, the operating performance of the claims versus premium will continue to kick in. As long as we look past the short-term volatility of investment, the long-term sort of a premium collected from being a liquidity supplier in the asset space would also come in.
Okay. Prisca from Straits Times.
Hi, thanks for the presentation. I have a question about your loan growth target. It's a mid-single- digit for this year. Just wanted to check, what was this target in the first quarter? Was there a reduction in the target for loan growth for this year? You've also had healthy loan growth of 8% this quarter compared with last year. Do you see this tapering off in the coming quarters? What are some of the factors affecting this? You mentioned the slowdown in economic growth that you expect.
Thank you for the question. We do change our guidance from the very early part of the year. Early part of the year, we were talking about mid to high-single-digit. Looking at the trajectory of the growth of the loan book and also customer demand, because I think first half of the year, there are a few events that actually cause demand to slow. I think this is quite across the industry. That is indeed an adjustment. We do think that first half of the year, we grew 3% from the end of the year. We think a mid-single-digit is the right number.
We do see momentum leading to the second half of the year to achieve that. I think, as to why the mid-year we grow 8%, year-on-year, I think that is actually a numerical number because the loan growth second half of last year was actually relatively higher than the growth in the first half of the year last year. Relatively, we have grown 8%, but as you said, taper off is because some of the loan book what came in actually second half of the year last year. Comparatively, that percentage will drop.
Okay. Nicholas.
Hi, Nicholas from Credit Suisse. Just a couple of questions from me. Firstly, on the deposit side of things, just wanna understand, you know, with rates going up, where do you think CASA settles? Would it be basically higher than where you were during the previous cycle? I think there's still quite a big gap there. And then the second question on non-interest income, could you just talk about, you know, the trends that you're seeing in July for wealth management and on the trading income as well?
We do see the composition of CASA. As we said earlier on, some of the CASA was shifted to fixed deposit. I think compared to the last cycle, we have achieved more CASA for the last two, three years, in principle, because there is quite a lot of acquisition of new clients as well. You look at our SME books, we have increased the book, the deposit on that end. Those deposits, a lot are for operations, so I think the percentage of CASA will be quite reasonable, but actually we expect it to trend lower into the second half of the year.
To compare to the last interest rate cycle, I think we are in a healthy position. The non-interest income, I think from June, July onwards, we see a bit of a better sentiment. Indeed, we don't want to say we have a lens to see into the rest of the year, because there is still quite a lot of uncertainties around the world, indeed. I think this year on non-interest income from wealth management in particular should be lower in that sense. As to the trading environment, it also depends very much on how the equity markets and how the capital markets are faring. Maybe, Darren, maybe you do have a view on trading?
Yeah. In terms of whether trading income pertaining to markets were sustainable or not, I think, alluding to what Helen actually say, the second half we expect the equity markets to continue to be volatile. I mean, obviously with growth and recessionary fears setting in, the downside for equity markets is pretty much unknown or whether this is bottom. From that perspective, while we are actually seeing some customers now, some pickup in terms of the investment products, we are actually not seeing the same momentum as we have in the prior year. From that aspect, the wealth income for the non-customer flow income, we expect that to be a bit slow. For the non-customer fee income, again, the trading books should do well with volatility in the markets, so we expect the momentum to be sustainable.
Okay. Thank you. Now we'll move to the questions online. First would be Akash from UBS.
Sure. Thanks, hi, Helen, Darren. Congratulations on a great result. I have three questions. The first one is on the net interest margin again. I'm just trying to compare this with, you know, the experience in the last hike cycle, which was back in 2018. If I remember correctly, there was a lag in OCBC NIMs versus the peers, roughly to the tune of like six, seven months. I think the way Sam and Darren were explaining at that point was it was something to do with the mortgage book. I'm just trying to understand, has something changed on that front which has led to this kind of, you know, strong pickup in NIM this time around? That's the first question. I'll come back to the rest of them in a bit.
That one you need Darren.
Yeah. Yeah. I think excellent memory, Akash. If you know, if you think about it, back then, we explained the reason why there's a lag is partly also because the mortgage part of our business, you know, require us to adjust the prime rate accordingly. Now, what is different this time around is also partly because of the movement into, as you know, the SORA part of the function in terms of our loans. Right now, we are looking at maybe 15% of our loan book that is SORA related. Because SORA related is overnight interest rate, and to some extent, the response time is even faster as compared to the regime of SORA and SIBOR. Which is why, you know, earlier responding to Nick's question, we were kind of pleasantly surprised by this upswing in terms of net interest margin.
Right. You think it's to a large extent because of SORA as well, which is that 15% of the book is SORA. As that increases, the pace at which it happens should get better.
Essentially right now, the, you know, the transition will continue to take place. The proportion would continue to. As you know, you know, the benchmark rate would be switch from SOR and SIBOR into SORA, so the proportion of SORA would only increase. I mean, in a way it's beneficial right now in the sense that the response time to market interest rate will be faster. But the, but the thing is that, should things start to turn, obviously you may see the adjustment downward as well. Now, the other thing is, the question then obviously is how much of our portfolio to some extent that could be adjusted there. There is also that amount.
Having said that, earlier, we do think that because of the rapid move in terms of interest rate, the response time by our customer base towards switching to fixed deposit has also not been as quick as before. If you think about it, during the second quarter itself, the increase in terms of interest rate was over 100 basis points. Actually, you look at it yourself, if I were to take a poll here, how many of you have actually switched your savings accounts into fixed deposit? Maybe not so soon, but after this, maybe you will, right? You know, in that sense, that response time pertaining to liability would actually move up.
Which is why, you know, in totality, the net interest margin that we saw during the second quarter in terms of improvement, you may not see that same magnitude and the same speed for the rest of the year.
Okay, great. Thank you. Next question I have is on the recoveries, and I think if I look at the slide correctly, it's Malaysia and Indonesia where a lot of these recoveries might have happened. Is that correct? And if so, then could you help us understand what is the nature of these recoveries? What sectors are they coming from?
Thank you for the question. A part of the large part of the recoveries are actually from the relief loan book. Remember, Malaysia, Indonesia, they do have quite a number of that outstanding. Indeed, as the economic activities revive and some of the program is ending, a lot of customers are coming into repaying back into the repayment mode as well. If you look at our relief loan size, it has continued to shrink over the last quarter as well. Part of that recovery is really upgrading of those loans in the two economies. Of course, some of the corporate side of things as well, there are some further upgrade from that.
Okay. Got it. It's mainly consumer?
From this.
Okay, cool. This last quick question I have is on the China property exposure. I think I just want to confirm that SGD 2 billion includes everything, right? Because I think when UOB disclosed, it was SGD 12 billion for them, which was onshore plus network, and you're saying the equivalent number is SGD 2 billion at OCBC, is that correct?
The thing is SGD 20 billion. 2%. Yeah, yeah. Sorry. Yes, we don't have really a big exposure onshore in China, just to confirm that.
Okay, got it. Thank you. That's all for me.
I'm sorry. We're taking question from Lisha from CNA.
Hi. Thanks for taking my question. I understand that some key parts of the business that drove performance in Q2 was banking, insurance, as well as wealth management. Going forward, which parts of your business are you most optimistic about? Based on current geopolitical tensions and the macroeconomic environment, what are some downside risks that you expect going forward as well?
Thank you. I think in the shorter run, banking would benefit very much because if you look at our results, as interest rates rise, and we talk quite a lot about net interest margin, the banking book would be good in that sense, because of the rising interest rates. I really want to say that business has not slowed down in the banking for even over COVID, right? Fundamentally, both our loans and deposits have grown and cash has grown. Banking would benefit from the current environment for a while longer. Insurance, I think a lot depends also on the sales. I think we're reflecting a good demand for insurance products in a more uncertain environment.
The pandemic also have generated more interest in insurance sales as well. Again, you know, insurance are also subject to how the investment book is like. There is always volatility. I think the direction of our insurance business positive. Indeed, we remain to be doing very good business in Singapore and Malaysia, the two big markets for our Great Eastern business. Wealth management will suffer for a little while. When we say suffer, that means that the investors would be a bit more on the sideline, looking at how the market evolve.
Indeed, the float of that new money is still there, because we continue to expand our business. For Bank of Singapore in particular, we have continued to hire over the last three to four years. Indeed, for the premier business, we have expanded our coverage on the products and our wealth management platform is now coming across both our private banking and also our premium private sector. I think the interest is there, the customers are there. We are positive in the longer run as we continue to build our capabilities across the Asian market. In particular, I think Singapore remains a very important wealth management center. We do see money flowing into here.
Hong Kong remains a financial center as our second important hub. For our private banking business, we have Dubai as a third hub that actually captures the Middle Eastern money and also some of the European high net worth. I think in the longer run, wealth management continues to be very important. This is reflecting a lot of the research reports or articles saying that Asia, the affluent market is continued to be rising in the next five to 10 years. Disregard there is a shorter term uncertainty about investment returns.
Thank you. Jonathan?
Jonathan from UOB Kay Hian. I have a question relating to your life insurance business in Malaysia. There's a requirement to lower foreign ownership. My question is what are the options open to you? Is there a renewed pressure to comply? In the past there was a mention of a contribution that you need to make to a charitable fund or a healthcare fund. Could you confirm the amount and how many years do you have to make such a contribution? Thank you.
Thank you for that. I think the questions come from some recent news report. I'm not going to comment on that. Our Malaysian operations of our insurance arm has been there for many years, and we have been following regulatory requirements all this while.
Pertaining to the amount, it's a one-off contribution in terms of donation. Pertaining to that development, we've not heard further. You know, either from the market or from our subsidiary, Great Eastern. Yes, but the amount eludes me at this point in time. We can come back to you. Yeah.
Okay. The next, we take from Anshuman, Reuters.
Hi. Hi, many thanks for hosting us, Helen. I want to check with you. I mean, we've seen acquisitions in this sector by your peers. It's been a year since you've taken charge. You've sort of had to handle issues, and it looks like obviously the sector is improving. What are your thoughts on any bolt-on acquisitions? Do you see scope there? If you could sort of elaborate on that. Thanks.
Thank you. There is always scope to consider inorganic growth. Indeed, I think it's important to see that we also have a lot of opportunities in organic growth, which is disclosed in our corporate strategy and when I did the results for the first quarter. Importantly, I think any inorganic growth, the interest has to benefit us in our three lines of three pillars of business and also in our core markets. We constantly will look at opportunities that come our way. We will evaluate. Of course, market uncertainties will cause a bit more cautiousness there when we evaluate such opportunities. Just have to say that, yes, we continue to look at such opportunities where there are suitable ones.
Anand?
Hi. Thank you. Anand from Bank of America. Just want to understand a couple of things. One, on your Singapore mortgage book, what kind of stress tests have you done? Basically, trying to understand what is the bottom decile of customers, what kind of rates they can take, what is the current debt servicing ratio they are seeing. Number two, on the China book, thank you for giving more clarity on the current state of the book. What is your current approach? Because OCBC as a franchise had big ambitions for the GBA strategy. What are you approaching? How do you see that in the next six, 12, 18 months? Do you see this now as an opportunity where other banks are staying away? You know, some color on that would be great. Thank you.
The Singapore mortgage book, we will do our stress test according to some of the priority parameters we set. Of course, there is also regulatory requirements or guidance on some of the factors that we use. Again, very much on the demand and supply. Again, it's very much on the affordability, very much on the interest rate impact on the repayments requirements for customers. We take in a lot of this. Of course, unemployment potential of job loss, I mean, all these factors we use for our stress test. That is always meaning the right requirements we put in to look at it. I think our book is fine as is resilient.
For the China book, indeed, our strategy is very much supporting the flow between Greater China and ASEAN. Very much on the investments that come this way. I think there's still quite a lot of business to do. I think the China Plus One strategy of many Chinese customers or multinational companies that they have actually started operations for some time now in some of the ASEAN countries. I mentioned in the past that we do see a very nice advanced manufacturing center developing in Penang, for example, where we have a good presence in Malaysia to support some of these flows of investments into the country.
As they also operate, some of the fintech companies from China also have come to Singapore, as we are all aware, and they are also eyeing some of the other ASEAN markets. This is something we really want to do as well. Of course, sustainability, right? Sustainable financing is required in all the core markets that we are looking at. Some of it is really renewable energy that we look at, the projects in this part of the world in Asia. Whereas the local book, I wouldn't say we will expand it big time. I mean, you have to think about the competitive positioning of us as a banking group.
In China, of course, it's not very competitive with the big local banks there. To compete by lending in China alone, that's not a good strategy, I would say. But to have Chinese company going out to here or even to other parts of the world where we have a good presence, indeed, that is something we want to do. You did mention Greater Bay Area. The wealth flow, of course, it has started relatively slower because very much because of the traveling caps. Indeed, Chinese customers who want to travel out of a Greater Bay Area into Hong Kong or vice versa has been very much limited. In the longer run, we do see the wealth flow as very, very important.
That is also one of the reason why our Greater China business for the high net worth segment for Bank of Singapore has grown relatively faster than the other sectors for other countries in Bank of Singapore. I think that is the trend, and we love that trend. The flow intra-Asia and the wealth flow and the increasing affluence in Asia, I think that works very well to how we look at banking and also in particular in the wealth management. As the market become more affluent, of course, our demand for insurance products will also increase.
I think the important thing is really putting our act together as one group, as one bank, to capture and serve our customers on a regional basis. Sorry.
The Debt Servicing Ratio in Singapore?
Sunny, you wanna comment on that?
Our TDSR ratio for our portfolio is in the low 40%, so we're very comfortable with that.
Okay. Then any color you can give on the bottom decile, because that's where you get into trouble. 40% is the average number, right? Low 40%.
Yep.
For last two years' customers, what that ratio would be?
We've been hovering below 50%, so I think there is something and our LTV is also very low. It's below 50% as well.
Okay.
Yeah.
What rates would you think, at what level your customers will still be able to take it before you start worrying about, any servicing issues?
We've been stress testing about 3.5%, and think we're very comfortable with that rate.
Okay. Above that.
Yeah.
You will start seeing some stress there.
Let's say, given the low LTV, I don't think there's a huge concern for us, for the Singapore books. Generally, the demand for Singapore is still very high. Looking at our mortgages a lot, 85% are owner-occupied, so I think that give us a bit of comfort in that.
Okay. Can we pass to Goola from The Edge?
Sir, yes. I think the question there was a question in the Greater Bay Area, and I'd like to ask a little bit more. You know, because under the previous management, there were a lot of plans for the Greater Bay Area. Do you plan to continue to invest in the Greater Bay Area? Sort of where do you see the potential with the Greater Bay Area? The second question is also your Hong Kong book, how does it work? Because the NIMs came off, didn't they? There was a decline in the earnings as well. Maybe if you could explain that. The last question is on insurance. Because you said that the three pillars of banking, wealth management, and insurance, what are your plans for insurance? Would you privatize Great Eastern eventually? Yeah, that's the question. Thank you.
I think on the Greater Bay Area, I also want to invite Teck Long to comment a bit on in particular the wholesale banking business opportunities. Yes, we indeed have a strategy for Greater Bay for quite a few years now. I'm happy to say that the business that we have done in that region has been meeting plan. A lot is wealth flow, as I said. You do recall I mentioned we have increased the number, for example, of relationship managers in the Bank of Singapore for Greater China really based in Hong Kong. That team is actually quite big. We have a total team of people almost 400 people on ground in Hong Kong.
That's works towards the wealth side of things. Indeed, some of the initiatives that we have taken and on how we continue to identify new customers in the Greater Bay Area and very much in Shenzhen. You know, Shenzhen is really a place for more technology and high-tech development. This is an area what we call the new economy where we have also increased our coverage and our book. Not necessarily really book in China. A lot of these customers actually use Hong Kong as a hub for the business. I would like to invite Teck Long to talk a bit about the opportunities there.
Thank you, Helen. I think Greater Bay Area continues to be a very vibrant economic region. As a foreign bank, the strategic positioning for China is really about delivering our network outside mainland China. The Greater Bay Area, there's two flows which is important to us. One is the mainland China/Hong Kong flow, so increasing Greater Bay Area flow. That actually plays to our strength, where we have a deep presence in Hong Kong. Of course, the other flow we spoke about, which is between the Greater China and ASEAN. We'll continue to be invested in that. Thank you.
For the insurance business, it remains a very key pillar to ours. As to plans going forward, whether how we actually take it, at what role it is actually sitting inside the group, I don't think I can comment on that. Thank you.
Andrea?
Hi. Morning. Andrea from CGS-CIMB. There's two questions from me. Could I ask if there are any trends from where in the region your wealth management AUM is coming from, other than you trying to capture the wealth from Middle East and Europe, as you mentioned earlier? Secondly, with the expectations of fees being softer as well as OpEx still being on the rise, where do you see your cost-to-income ratio ending up for the year, especially when you incorporate the upside coming from NIMs? Thank you.
Wealth management, we predominantly have to look at two parts of it. One part is the private banking part of it, high net worth individual. The source very much, I mean, Singapore remains the largest center. Of course, it is because this is indeed a wealth management center in Asia. We do cover substantially people residing here and people who actually park their wealth here to be managed here. That's one big source. But of course, when we say money managed here, also include Indonesia, Malaysia, and we have a team that covers Greater China, as we said, so a big team sitting in Hong Kong. Two booking center for Bank of Singapore.
We have Dubai and presence in Luxembourg and also London. On that part of it, we cover the European and the Middle Eastern clients. Eventually the booking center will be here in these two hubs. We also cover North Asia, so our Japanese clients, our Chinese clients, et cetera. I think the main source is, if you look at it, will really be here, where money being managed here and also in Hong Kong. The Greater China portion of it was growing quite rapidly compared to the rest of the region and I wouldn't underestimate the potential of Middle East.
On the second one, the cost-income ratio, as we look at NIM growing and NII growing, which if you can look at the second quarter, it more than offset the non-NII. With that, obviously with a quite cautious approach to how we grow our expenses. The first half is positive, obviously. If that trend continues, we hopefully will see a further lowering of our cost-income ratio for the full year.
Right. Thank you, Helen. We'll now move back online. We have Weldon from HSBC. Over to you.
Hi. Thanks for taking my question. Can you hear me? Hello.
Yes, we can.
Thank you. Just three questions. The first one is on NIM. I just wanted to just get some clarity on that NIM trajectory that you talked about. I think you said that exit NIM is same as the quarter NIM. Can I just understand how that works? Isn't there a lag in your repricing? Because there's quite some movement in the floating rates in Singapore in June as well. If you can give some early indication of your July NIM. That's the first question. Then the second question, I know you've said you stress tested your onshore China exposure. Your Singapore book is good as well. Do I understand your credit cost guidance in that it is mainly to cater for SP? And if it's, you know.
You've also revised your MEVs. Is it true that if there's not much SP, then you can just take a very low single digit type of GP? The third question I just have to ask because the dividend per share is increasing, I guess, year-on-year. Is that an indication, given that you've done a lot of stress tests and all that you can also release some of the capital in the second half? Thank you.
I think just to clarify on the second quarter NIM, right? Exit NIM, I think Darren did talk about the exit NIM is 1.71%. Yeah.
Yeah.
Darren, you want to-
Yeah.
Yeah.
Actually, I was smiling to the last question because I was hoping to get past this briefing without a question about dividend and the capital. We'll leave it at that, you know, in terms of SGD 0.28. Then in terms of NIM, we can't provide any feedback on the July number. If I can take a step back, I think it's more important to look at NIM from an average angle. The exit NIM will be important as a guidance in terms of the direction. What is more important is what is the average NIM, you know, during the period where you have the loans outstanding, because that's when you earn the interest, you know, income.
Perhaps if you allow me to kind of respond to your question, directionally, exit NIM on a month-on-month, quarter-on-quarter basis, in a rising interest rate environment, if you purely look at ALM angle, it should be on the rising basis, right? That essentially would translate into higher net interest income for us, provided obviously, you know, in this case, we even more if let's say we can grow our loans further. If I may actually come back to the question that Goola asked about Wing Hang.
In a way also substantiate why the current accounts and savings account has not done as well, and the interest margin has not increased, is because in Hong Kong, obviously we are not sort of a top three player, right? Correspondingly, our CASA is not as high as what we have in Singapore. Now, what it translates to is that to a certain extent, some of the loans we have to fund ourselves in the market. When you fund yourself in the market, you become a you know, sort of a price taker. Essentially in Hong Kong market, the three-month rates is where you have to be a price taker. Compared to essentially, then you might ask, why is not the asset you know, sort of repricing as much?
In this case, on the mortgage side, we also are reliant on the benchmark rate that is, one month, predominantly mortgage related. The steepness of the curve would mean that even though we have to find ourselves in the market at a higher rate, we were not being able to pass on completely, to our customer base in Wing Hang. Which is why the NIM in Wing Hang has not increased as much. Again, back to the angle in terms of, CASA. Maybe, you know, just the point on privatization, right? Now, what is important, is just looking at the rule pertaining to leasing and privatization itself. I wouldn't point to our intention.
The guidance now in terms of privatization of any company that is listed on SGX is 90% of what you don't own. If you use that as an indication of what is the direction of 90% of what you don't own. That rule has changed maybe about two to three years back.
Back to the question on the provisions. I think that's a question about how do we actually see the second half of the year. I do want to repeat again that second quarter, we do see some recoveries, and we're saying that would that happen all the time? Yeah, perhaps not. I mean, that is not very normal that every quarter you see some substantial recovery. The second thing is we do talk about headwinds. Inflationary pressure is still there, and we're just saying that depends on how inflation actually affects our customers, our businesses. We still need to think about that potentially second half of the year could would require us, first thing, to have a more normal provision.
Looking at the book, we do not know. I mean, depends on how things evolve in various parts of the world and also the geopolitical tensions, et cetera, et cetera. Whether we do think that we need to have some management overlay as well on ECL. We're just saying that second half of the year would unlikely look like first half of the year. That is why we're projecting a double-digit credit cost compared to the first half of the year.
Maybe a last question.
Thanks. This is Harsh Modi from JP Morgan again. A couple of follow-up questions. What are your LCR and LDR targets, or where do you think they should be by end of the year? I am guessing you're at 140% or thereabouts on LCR right now. Yeah, 146%. So how low do you think you can go? LDR even at 85% seems to have enough space for you to manage. I have a couple more after this.
The LCR is a, you know, as you know, it's a behavioral function of your liquidity, right? To answer your question, I mean, with the same dollar, we want the LCR as high as possible, and that will means in the form of a current accounts and savings account. You know, if you see our LCR right now because of the high proportion of our deposit in the form of CASA and, you know, sort of a CASA, current accounts and savings account, naturally it'll be high. To answer your question, there isn't a particular LCR that we wanna target, meaning lower is better. In fact, you know, maintaining the proportion of current and accounts and savings account would actually be better.
In that sense, you know, as a bank, obviously having a high LCR is preferred route. But having said that, I know the question you're gonna ask is, then you have too much liquidity, you're not deploying efficiently, right? In that sense, if you look at how we have been managing our LCR at the current range, essentially has not translate into a sort of inefficiency in terms of our net interest margin. In that sense, this is a level we're comfortable with.
Yeah. Basically trying to dimension the NIM pickup in second quarter or second half. On LDR, 85%, how high do you think you can be able to?
Yeah. LDR is, on the other hand, a more quantitative level of essentially highlighting whether you're using your deposit well, right? Because there's no behavioral component to it itself. Holding everything else constant, you know, the most efficient way of looking at LDR is probably about 87.5%, you know, less 2.5% of capital, right? At this point in time, 85%, roughly 85%, 84% that we have. I think there's room obviously for us to essentially ratchet up LDR, and in that case, also correspondingly, the LCR can be reduced as well.
Thanks. Are you facing any risk that as some of the benchmark rates move up, some of the borrowers start getting into problem? Would you kind of stop the rate pass-through to the full extent, or you start taking lower credit spreads to offset some of the higher benchmark rate? Because in a lot of markets, you're starting to see regulators coming in and telling banks, "Do not pass on all of it." Not in Singapore, but are you facing that in any markets? At what point in time would you start reconsidering the extent of pass-through?
Yeah. Maybe I'll respond to this first and then, you know, if the asset is based on a reference benchmark, the pass-through is automatic, right? So it'll be true. Now, in terms of assets, loans created to clients itself, that spread itself is really much based on competition. In the context of where the market is, I mean, you still heard about liquidity, you know, excess liquidity, abundant liquidity, LDR relatively low across the system itself. That competition actually translate to the fact that the spread will be still remain tight. Now, whether there's any guidance to us not to pass through, at this point in time we have not received any guidance. Now, to what point would that translate into some difficulties in terms of the borrower? I guess, you know, it's
Which is why we do the stress test all the time, right? You know, essentially higher interest rate, what are the sectors that could be affected and things like that. I think what is more important for a bank, essentially if you look at it's because we are diversified across the industry, across, you know, various segments and so on and so forth. What is more important is not to have a specific segment that is being affected. Again, if we can kind of go back to our experience in the oil and gas space, right? If you recall, I mean, back then we have significant NPL, SP pertaining to the oil and gas space. What's the rationale? It wasn't because the interest rate was higher.
It was because oil at one point in time was close to zero, right? If you think about it, if you have a product that is close to zero, you know, essentially your profit margin is completely wiped out. That is a specific event that we have to be more mindful of. In that sense, yes, interest rate we are watching out in terms of what it means in terms of economic impact on various industry segment. More importantly, we will be more sort of based on experience in oil and gas space, right? We will look out for more specific event pertaining to one particular industry segment. The experience that we have is that the impact arising from one particular segment will actually be higher than, say, a high interest rate on the general economy itself.
Okay. Thanks.
Yeah. I want to add on to that. How we look at pricing our loan book also depends on what the competition is like and what customers we are banking with. In a way, we look at the overall portfolio quality and pricing is done accordingly. You would sometimes avoid certain transactions because of the risk element in it, but sometimes it's also because the price risk return just doesn't sound right. If credit cycle turn, indeed there are more customers that will actually pose a higher risk. Of course, pricing normally will reflect it when they have to refinance their portfolio.
Also you would also see some of the better credits could potentially command a better pricing as well, because there would always be a flight to quality. Pricing of the book does not necessarily work that way as how much you desire you want to actually pass through or not. It is very much on the how do you select your clients and what sort of market dynamics it is regarding the pricing for these clients.
Thanks, Helen. The last question. If you do get opportunities in next 12, 18, 24 months, for inorganic growth, what would be the minimum hurdle rates for returns that you would think about? Any broad guidance? I know it's very tough to be specific. What would be broad numbers or guardrails in terms of returns we should expect in case you do any inorganic growth? Thanks.
You are right. It's very difficult to give you a number. A couple of reasons. The first one is it depends on what business we are looking at, right? And whether it consumes our RWA or it doesn't. It is very difficult. You do have to look at it, then obviously one big guiding principle is what is our return on our capital, right? That is one big guiding principle. We have our risk appetite statements. We do know what the current return on capital is like. That's one guiding principle. The second thing is whether in the longer run the acquisition, the inorganic will benefit. For example, would help us to increase our market share and to enable us to cross-sell into other business.
That is also a very difficult thing to calculate until you see the opportunity to say, "Hey, this acquisition may not be accretive now, but the potential cross-reference, the cross-introduction of business can actually impact, for example, a portfolio where we purchase, for example, could actually generates other form of a business to the consumer base if we buy a corporate portfolio, for example. It's just difficult to give you a rate, but the guiding principle is what's the return on our capital. In the longer run, how that actually benefits us in terms of market share as well.
I think these are guiding principles, but we won't be able to say whether something actually we really want to invest in would definitely use certain things. Some are defensive. You do know that inorganic sometimes is defensive. If you don't do it, then you lose market share. In that point of time, the return will be lesser of an issue, but importantly whether you will lose out in the longer run.