Oversea-Chinese Banking Corporation Ltd

SGX:O39

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Thank you very much for joining us for our First Quarter 2023 Results Briefing. So we have, on today's panel, is Ms. Helen Wong, our CEO; and Ms. Goh Chin Yee, our CFO; and Collins, which is our Head of Investor Relations. So on the line, we have Chanya from Bloomberg and [indiscernible].

Okay. So we can start with Chin Yee taking us through the slides. Thank you.

[Chin Yee Goh, executive]

Good morning, everyone. Welcome, and thank you for joining us for our first quarter 2023 results presentation. We announced our results this morning, and we are pleased to start 2023 with a record quarter. I will now share more details about the results.

Let's turn to Slide 4. For the first quarter 2023, group net profit reached a new high of SGD 1.88 billion, an increase of 39% from the same period last year and 44% above the previous quarter. Net profit from banking operations also registered strong growth to a record SGD 1.68 billion. Total income climbed 12% quarter-on-quarter with new high of SGD 3.35 billion, underpinned by the group's diversified income streams across banking, wealth management and insurance.

Against a record level in fourth quarter 2022, net interest income was 2% lower, largely due to a stronger first quarter 2023. NIM was resilient at 2.30%. Cost-to-income ratio was 37.1%, the lowest level in [indiscernible].

We continue to be prudent in risk management. Credit cost of 12 basis points were lower quarter-on-quarter, and our loan growth was sound, with NPL improving -- NPL ratio improving to 1.1%. With our strong performance, return on equity rose to 14.7%, a multiyear high.

Moving on to Slide 5. Our banking operations net profit rose 28% from a quarter ago and 43% year-on-year for a record SGD 1.68 billion. The group's wealth management business continued to perform well. Wealth management income increased 33% quarter-on-quarter, driven by growth across our wealth franchise.

AUM grew to SGD 270 billion, underpinned by continued momentum in net new money inflows across all wealth management and positive market valuation. Net new money fresh funds for the quarter was about SGD 10 billion. Total with new sales and new business embedded value and that [Indiscernible] for our insurance business declined year-on-year due to lower single premium sales from Singapore. These was compensated partially from better performance in regular premium sales.

NBEV margin improved to 43.4% from the shift actually met our insurance product mix.

Moving on to Slide 6. We continue to maintain a healthy balance sheet position with our regulatory ratios well above requirements. Our capital is strong, and our liquidity positions are healthy. This provides ample buffer for uncertainties and allow us to pursue growth opportunities as they arise.

Moving on to our tier performance slides, starting from Slide 8. As shared earlier, profit from both the group and banking operations were at record levels. Group operating profit before allowances rose 24% quarter-on-quarter, plus 2 billion for the first time, driven by income growth and lower expenses.

Let's move to more details on the drivers of our net interest income on Slide 9. For this, the first quarter last year, with net profit of SGD 1.88 billion was 39% higher. The strong rise in earnings came on the back of the 56% increase in net interest income. Go back to the previous quarter, our 44% increase in net profit was from a combination of recovery in noninterest income as well as a decline in expenses and allowances.

Moving to Slide 11 on our net interest income. Net interest income for the quarter was SGD 2.34 billion, more than 50% compared to last year. Compared to the record level in 4Q of last year was 2% lower, primarily because the first quarter 2023 was compared [Indiscernible] than the previous quarter. If adjusted for the short-term days effect, net interest income was largely unchanged. Net interest margin, or NIM, was 2.3%, 1 basis point below the previous quarter. This was due to true reserves.

First, while asset use increased, this was offset by an expected catch-up in our funding costs, which we highlighted in our previous results. Second, loan to deposit ratio was lower, and deposit growth outpaced that of loans. Our exit NIM for the quarter was 2.31%.

Turning to the next slide. For the first quarter 2023, noninterest income was SGD 1.41 billion, higher than the previous quarter. The improvement was led by a rise in our fee and trading income as well as net realized gains from sale of investment securities. The group's insurance profit for this quarter was reported based on SFRS 17 insurance, GEH conducted on 1st January 2023. Prior comparatives are not restated.

With the implementation of SFRS 17 by the team, by GEH, insurance profit is expected to invest full account, due to the reclassification of insurance assets and liabilities to fair value to other competency income or FVOCI portion. In this, we'll remove a significant portion of previously observed volatilities from the valuation of insurance assets and liabilities. More details on the impact of SFRS 17 and the restated comparative information will be disclosed in our first half 2023 announcement.

Turning to the next slide. Fee income increased by 14% from the prior quarter to $453 million. This was mainly driven by a 37% rebound in GEH management fees. We will see the declines observed over the last few quarters. There was an incurring GEH recovery fee in investment sentiments during the quarter, with increased sales across most GEH management for that categories.

Turning to Slide 14. Trading income was 251 million, up 69% from the last quarter. The strong growth in trading income was a result of the [Indiscernible], with customer flow income and higher non-customer flow trading income from mark-to-market gains of our equities and debt securities portfolio.

Next slide on operating expenses. Operating expenses declined 4% for the quarter ago [Indiscernible] SGD 1.24 billion, mainly from a decline in other expenses arising from the reduction of insurance-related expenses against insurance revenue, following GEH adoption of SFRS 17. Stock costs were higher, reflecting our ongoing investment in our talent pool to support business expansion.

Cost-to-income ratio was 37.1% for the quarter.

Moving to next slide on allowances. Total allowances for the quarter were SGD 110 million, with about half for pricing general provisions and half in specific provision. This was substantially lower than the SGD 314 million of total allowances in fourth quarter of 2022, mainly due to comparably higher general provision set aside last quarter. Total credit costs eased quarter-on-quarter to 12 basis points.

Next slide. Our NPA coverage ratio improved by 7 percentage points from the last quarter to 121% from an increase in cumulative allowances and decline in nonperforming assets.

Moving to Slide 18 for more details on our nonperforming assets. Our portfolio quality remained resilient. NPAs continue to trend lower as at March 2023. Compared to the previous quarter, total NPAs were 5% lower at 3.3 billion, with declines across our key markets of Singapore, Malaysia, Indonesia and Greater China. NPL ratio improved by 01 -- 0.1 percentage points from last quarter to 1.1%.

Moving next to Slide 19. For the first quarter 2023, higher recoveries and upgrades more than compensated for new NPA formation. New NPA formation was lower Q-on-Q across both the corporate and consumer book.

Moving next to Slide 20. Loans grew 0.2% from the previous quarter and 3% from last year in constant currency terms to SGD 294 billion. Our loan portfolio remained well diversified across geographies as well as industries, even broader concerns on the commercial real estate sector in developed markets such as the U.S., I would like to share more information on our commercial real estate or CRE loan portfolio.

CRE loans are mostly to network customers in our key markets with proven track records and financial strength and are largely to support economic expansion and operational growth. Our overall LTVs are low and are mostly secured. We continue to play a key role in our customers' transition to a low carbon economy, with sustainable financing loans growing 33% year-on-year with [ $32 ] million, making up 11% of our group loans.

Moving next to customer deposits. Our customer deposits of SGD 367 billion were 5% over last quarter as well as the previous year. This was driven by strong growth in fixed deposits from CASA migration and, in particular, fresh funds placed with us, which has impacted OCBC strength and trust. Accordingly, our CASA ratio trended lower, below 50%. The group's liquidity remained at bulk and LDR on loan deposit ratio headroom is supportive of our future growth.

Moving to the next slide on capital position. Our core CET1 -- our core equity Tier 1 ratio rose 0.7 percentage points from the last quarter to 15.9%, mainly driven by profit acquisition. Excluding our 2022 final dividend to be paid next week, CET1 will be 15.1% from the pro forma business. Our strong capital position is supportive of business growth and allow us to navigate uncertainties as well as to capture opportunities as they arise.

Moving next to Slide 23. I would like to provide more details on our government and debt securities holdings as this -- there have been recent concerns on the banking sector's exposure to these globally. More than 90% of our government and debt securities portfolio are fair value, and mark-to-market movements have been reflected in the compensation of our capital adequacy ratios.

Above 80% of the total portfolio was classified as fair value to other comprehensive income or FVOCI. Year-to-date, our FVOCI fixed income securities portfolio have seen unrealized gains of about SGD 0.2 billion. And our auto maturity portfolio of SGD 5 million have been significant mark-to-market effect. Overall, the average duration of our total government and debt securities portfolio is between 1 to 2 years.

With this, I end my presentation and will now pass the floor over to Helen.

[Pik Kuen Wong, executive]

Yes. Thank you, Chin Yee, and thanks, everyone, for coming to our office. I think there are also some of you dialing in on the phone. So thank you all for attending this session with us.

I think Chin Yee has given quite a detailed presentation on our financial numbers for the first quarter of this year. I'll just add on with 2 slides to show some of the highlights and the points that I may want to comment on and what's the feel about the business and also how we look at that going forward through the rest of the year.

So just turning to that Slide 2. We look at -- as Chin Yee said, we have a record high total income, operating profit before allowances and also net profit. So these are all record high. And I'm happy to say that this is despite some of the global volatilities that we have seen, in particular, for the developed market and in certain part of the banking sector. But I think the robust performance also reflects where we are, that we call ourselves a leading Asian bank with our network in the rest of the world, but predominantly in ASEAN and Greater China and also reflect our franchise in banking, insurance and wealth.

So just want to comment a bit on the net interest income. We think this is the second highest on record, supported by resilient deal. And this is very important because we are talking about last quarter, quarter 4 of 2022, we have an average NIM of 2.31%. And this quarter, we are at 2.3%. So a 1 basis point drop. But that means that we've been managing our balance sheet. In particular, our funding costs are quite well in order to achieve that.

So this is important as we, in January, look at interest rate have peaked. And it will go -- we do have an assumption that it will go stable without -- I think that the chances we are looking at assumption that we do not see interest rate reduction this year, in the rest of the year. So that is the assumption we work on as we continue to work on our balance sheet and how we support our business and protect the NIM. So that's how we look at NIM.

On the wealth management side, we do see a rebound in customer activities across our wealth management business, as investment sentiments do come back a bit in the first quarter. It's important to say that momentum, I wouldn't say it is coming back strongly as yet because of, we say again, the volatilities of the financial markets, yes.

But important is we are seen as a point of strength that we are a highly rated bank, and we do see net new money in both this quarter across private banking, [indiscernible] and also premium banking segments of something of a net inflow of SGD 10 billion, which is a sizable amount, which we want to be able to keep everything. And eventually, as investment sentiments come back, we can open the products and utilize this increase in our AUM.

And as to the -- on the expense side, I also want to mention that we are disciplined. But as again, we continue to invest into our people and into our digital infrastructure so that it's part and possibly the impact to a more effective process for our customers. In particular, I think we talked about deposits for our order time.

And CASA, it's important that we allow our customers very -- a lot of ease to operate their operating accounts and to open new accounts with us, that so we have then to expect our deposit base as well with more operating accounts rather than people really just look on you and pass everything into fixed process.

I think that investments continue to be important. But likewise, we -- expenses for the first quarter is quite well maintained.

On the loan side, I think due to uncertainties and also economic situation and still a looming feel of recession, we see trade not rebounding as much. And -- but hopefully, trade will increase as China opened up and the supply chain come back a bit more to normal. But we have indeed focused very much on nontrade corporate loans in areas which we have actually seeing opportunities and that offer quality. Examples like energy and utilities, and of course, are very much related to sustainable financing, real estate segments like accommodation and technology and digital infrastructure. So these are the segments that we manage to grow.

And in a way, we also talk about geopolitical tensions affecting economic growth, right? But in that sense, we do see opportunities of banking more multinational companies in this region as the -- as competitors from the rest are less -- in a way, less competitive now in Asia. So we do see an opportunity like that.

Housing loan, Singapore remains to be our biggest mortgage market. We see -- we also saw a slight increase in the first quarter, supported by drawdowns from our very strong existing pipeline.

Auto, we do look at cooling measures, the recent cooling measures may dampen mortgage sales. So I think this year, we still look to be okay. Of course, it depends on how the rest of the years unfold as we continue to build our mortgage pipeline.

So overall, first quarter loan growth value to [Indiscernible] have been muted but partly due to lower short-term trade loans, often compensated by a slight growth in mortgages and also in our corporate loans. Asset quality is benign. No signs of systemic issues so far. We continue to do stress test. And depending on what we see in the market, we look with a forward-looking. We do -- certain sectors restricts more.

For example, recently, we do look at whether there's any contagion effects from regional banks in the U.S. But we don't have exposure, but we'll -- of course, we'll look at how that impacts U.S. dollar liquidity, and we stress it accordingly.

We have also continued to look at pockets where we think that may be riskier in the normal debt, potentially will be impacted more by recession and all inflationary risk. So we accordingly stress test output. We continue to have a prudent level of allowances. But also our NPA, our NPA coverage ratio is about 120%, as illustrated in the slides that Chin Yee has gone through in more details.

[indiscernible]. Looking ahead, I think we are well positioned. Important thing is that key market in Asia, expected to stay resilient. Yes, in this thing was growing slower, but there are also some patches of brighter factors. I think services industry is doing well. Singapore continued to be a safe hub and maintain the safe hub status. And that's why we think the well AUM potentially can grow in the more -- in the rest of the 3 quarters.

And the Malaysia, Indonesia, we are growing above group total average. Greater China, we see more confidence coming back as the corporate is behind and also with a multiple government measures to stimulate it to economic recovery. We'll see the May holidays are a lot of traveling and so -- including domestic and traveling overseas as well.

So Hong Kong was quite crowded, I was told. And a colleague told me, he was trying to drive out of Shanghai. And then with 4 hours, he's still in the [Indiscernible] Shanghai city because of the traffic all going out when people want to enjoy their holiday.

We -- I mean, having said all that, we have to and we will continue to closely monitor the market volatilities, right? And the tightening financial conditions around the world have slowed down inflation but also likely to dampen total growth. And indeed, we're watchful of increase in overall risen volatilities arising from, as I said, pockets of issues and in developed markets, such as the banking sector, which I mentioned earlier on and commercial real estate in the developed markets.

Ongoing political tensions, it will continue to be that, will continue to impact the landscape. But we are well positioned. And indeed, as I said earlier, there could be more opportunities for us in the political tension continues and customers, some of even the M&C for the China plus one strategy in Asia to look at the support of a strong Singapore bank.

So these are opportunities that made the volatility and the tension.

We do want to change some of our targets indeed as we look into how the first quarter has unfolded. So the NIM, we want to change it to the region of 2.2%. Well, that would indicate from 2.3% in the first quarter, that will be we see a general decline in that. And the reason being that, I think the loan portfolio do have -- do not have a lot of potential to reprice it upward, but the funding cost will continue to catch up, which is a natural phenomenon in a rapidly rising interest rate environment.

So we -- so it will be lower, but we think that it could be in the region of 2.1 -- 2.2% instead of the 2.1% guidance we previously provided in the last quarter.

Our views -- and this again, based on a view that interest rates have peaked and then the -- indeed, there is -- we're not expecting a fat-cutting interest rate in the rest of the year.

Loan growth, and given the experience in the first quarter and the volatility, we are saying now we expect loan growth to be low to mid-single digit. Whereas credit cost, we maintained that 15 to 20 basis points as a credit cost. In general, in an environment like this, we do expect generally that NPL may rise during the rest of the year. So we want to give back by guidance on the credit cost.

And last point, we want -- I want to just mention sustainability. I think Chin Yee talked about outstanding on our book, offset [indiscernible] representing 11% of the loan book, which is a 30-something percent growth. And indeed, if we look at commitment, commitment is at 47 billion, which is very close to our target of 50 billion.

I'm not advising -- I'm not adjusting this because there's still another 2-plus years into 2025. But again, that doesn't stop our hopeness on helping our customers to transition into net zero.

So it's not just the corporate, it's not just the SMEs, but also one point -- one example I want to highlight is we have been launching what we call our Eco-Care Loans to our retail customers since 2021, and we have still good trajectory. And also, we have built a couple of billions on that portfolio already. So also helping to retail segment.

And the coming up would be our net zero [indiscernible]. We talk about how we look at it as we have drawn a net zero banking alliance, we're going to make some announcement. And I think Chin Yee, we have already invited the media.

[Chin Yee Goh, executive]

Actually [indiscernible].

[Pik Kuen Wong, executive]

Yes. [indiscernible] So coming out [Indiscernible]. So I think I'll just stop here. So Chin Yee?

[Chin Yee Goh, executive]

Yes. So thank you, Helen. We will now open to -- the floor for questions.

[Chin Yee Goh, executive]

[indiscernible]

[Unknown Analyst]

I'm [ Jodie ] from [indiscernible]. So I think my first question is just on your -- can I have more color about the NIM outlook? So I think you mentioned, this is by starting upwards to the region of 2.2 for the rest of the year, right? But compared to UOB, which was [indiscernible] once. So can you give me some reasons behind why you priced upwards? What is the expectation for the rest of the year? Why this [indiscernible]?

[Pik Kuen Wong, executive]

I wouldn't call it optimism. It's like because we have a higher starting point. You remember last year, the fourth quarter, we were at 2.31, whereas in [indiscernible] January, don't comment on this, but we have the higher starting point.

So I wouldn't say it's optimism. It's what we see and how we manage our balance sheet lead us to a 2.3% in the first quarter. So to an extent, 2.1% would not be a natural conclusion for a whole year. So that's why we adjusted.

Also to give that feedback to our shareholders, to our stakeholders to show that. This is actually how we see, but also, again, based on some of the assumptions, right?

I think last year, the lot of assumptions is that, that will cut interest rate beginning third quarter. We're seeing that the assumption is not, they won't. So it's reflecting how we see and how we protect our balance sheet to look like.

[Unknown Analyst]

I think -- so just to mention [indiscernible] loan book. And in some areas, that impacted more than others with the recession. So you mentioned stress test was certainly [indiscernible]. Can you give me more color on this?

[Pik Kuen Wong, executive]

I think we look at certain -- the banking sector, what that does [Indiscernible] will back into Asia. We do look at developed markets, commercial real estate because our linked banking real estate is always closely linked together. We do have commercial real estate exposure in the developed markets, namely in the U.K., U.S. in Australia. So I think this -- that, that -- we look at this actively. And in a way, stress testing is also testing on how we [Indiscernible] on if there's a liquidity [Indiscernible] in the marketplace as well. So I think these are some of the increase.

I mean we do stress test all the time. That's why we said that their pockets that they have issue, then we'll do further stress test and stress a bit more on that. Even on the -- for example, even on mortgages. So we're seeing that tightening measures and all that, and we would obviously [Indiscernible] and test a bit more on that repayment capabilities of our mortgage book as well.

[Chin Yee Goh, executive]

Maybe we'd like to take this call first and [Indiscernible]

[Unknown Analyst]

[indiscernible] is kind of a lot lower than the fourth quarter. So why is it still given that you're expecting some strike with the banking [indiscernible] over years and tightening financial conditions at all?

[Pik Kuen Wong, executive]

Actually, in the reverse, we must say we actually look forward earlier. So in the fourth quarter, we do make some general provisions on this state, which we did explain when we were talking about the fourth quarter results. So in a way, we have done quite a bit prior, I think, to the beginning of the year. So when you look at this quarter, we still have a mixed provisions on the general -- mixed general provision. But specific provision, we do not see a lot of stress. And as we look at our books, our quality is still quite good. So I think that explains the reason why we seemed to have a lesser provision in the first quarter compared to the fourth.

[Chin Yee Goh, executive]

Maybe we can take questions from Chanya who is in Hong Kong right now. Chanya?

[Chanyaporn Chanjaroen]

Hello, can you hear me?

[Chin Yee Goh, executive]

Yes.

[Chanyaporn Chanjaroen]

Yes, I have -- Helen, congratulations on the numbers and also the stock that [Indiscernible] for you this morning. I have 3 questions. The first one for clarification. The growth opportunities that you mentioned in your comments, could you please help clarify whether there's any M&A included in debt at all? Second question, did OCBC or Bank of Singapore sell AB Credit Suisse AT1 bonds to customers? And any number of losses involved on the clients' side?

[Pik Kuen Wong, executive]

You said 3 questions. I wrote down 2.

[Chanyaporn Chanjaroen]

I just realized that you have replied the [Indiscernible] questions. Sorry.

[Pik Kuen Wong, executive]

All right. Thank you, Chanya. Thank you. Yes, yes. Okay. Growth opportunities, M&A is something we do look at opportunities all the time. Nothing specifically we can talk about at the moment. So that -- we still -- we continue to be interested in our core markets and our core business and that has a complementary effect on our franchise.

On the CS AT1, we have very few clients who have an exposure. Actually, that is so insignificant. I don't -- and I can't tell you a number, but it's very insignificant. And so the -- and somebody may ask me whether I have margin calls that exactly I can single marginal cost, which reflect how little -- how they feel that is in that sense.

[Chanyaporn Chanjaroen]

I see. I see. Sorry, just one last thing about the ROE, which is quite high at 14% for the first quarter. Do you see that being sustained for the rest of the year?

[Pik Kuen Wong, executive]

Chanya, that's quite a complicated question because on the equity side, the amount, once you go, people -- Chin Yee, can talk about what impact that equation return on equity. But I think the important thing is that we want to continue to have the business momentum that we protect the income, right? It don't grow a lot because of a very largely NII. So we need to protect our NIM, especially when we say in the market of uncertainty that the notebook is not to grow substantially, yes.

So -- but I hope to that we want to -- I did talk about the [ 1 to 4 ], our ROE about 12%. I'm not going to change that. Whether it will be 14 end of year is that various factors affecting it.

[Chanyaporn Chanjaroen]

I see. I see. Sorry, just one last thing about the inflows in AUM that you mentioned. Could you share whether there's any or much coming from Credit Suisse?

[Pik Kuen Wong, executive]

Chanya, sorry, we don't comment on a certain counterparty. I think is that it's [Indiscernible] in general across our network. So if you ask me, yes, continue to have float on [Indiscernible] in Indonesia and domestically as well. And no it's not entirely into Bank of Singapore as well. We have very decent flow into our CFS business, into premium, private and also into premium. So I think I'll cover that much. Thank you.

[Unknown Executive]

[Indiscernible]

[Unknown Analyst]

Helen, about actually, you normally don't give the target for fee income growth. But could you give us some guidance about this year? Will you still continue to double-digit growth in this year?

[Pik Kuen Wong, executive]

That's the plan. That's the plan. But a lot depends also on the market situation. For example, if trade in Asia, we [Indiscernible] quite a bit, then of course, your trade needs will -- the trade fees will increase, right? If investment sentiment is better, then, of course, the wealth fees will also increase. So it quite depends on how the rest of the year unfold. But compared to previous years, I think that, that's what we are planning, but we hope that it will be double-digit growth.

[Unknown Executive]

[indiscernible]

[Unknown Analyst]

Helen, I wanted to ask [indiscernible]. Do you hopefully arise in several provisions? And have you increased the management overlay considering both the [indiscernible].

[Pik Kuen Wong, executive]

The first one is it has eased. Do I see what the trend, right? The second part is metro billing?

[Unknown Analyst]

Yes. [indiscernible]. And the second one is [indiscernible].

[Pik Kuen Wong, executive]

Okay. The first one, yes, I do see, in general, a rise, and that's why we're saying that we keep -- I mean at this point, we still want to keep our credit cost to be 15 to 20, whereas first quarter is 12. But if you do look at our credit cost, I think there's a detailed slide on how provisions and NPL has changed. So that put some light on why the first quarter is [Indiscernible].

So -- but as I said, when we say in general, we do expect it to rise is because, as we said recession is still looming, inflationary pressure is still there, customers' actions are quite cautious. So all this together, we do expect provision to rise.

Management overlay, we did some in the fourth quarter. Also this quarter, we put in some as well. And for -- as I said, for commercial ramping in developed markets. So we do this from time to time, and we adjust it. But in a way, always remember to be forward-looking, do something a bit earlier rather than say mainly it happens, that certainly, the amount jumps up very high.

[Unknown Analyst]

So I think building on that, you mentioned the commercial real estate a couple of times. So a number of precluding office brings at Hong Kong and repossessed by bank's debt. And I think that [indiscernible], do you have commissions on stress in the Hong Kong [Indiscernible] as well. So what is exposure to the sector given that, that speaks for U.S. property? [Indiscernible] speaks for Chinese assets are already raising pressure as well. So what's the knowledge on this matter about China -- Hong Kong's [indiscernible] that you see there?

[Pik Kuen Wong, executive]

I need to recap to say that I did mention that the costs, we are talking about pockets of the weakness, right? It doesn't mean that I'm very concerned about the state proposals. It's not like that. But if you look at our book, our real estate is about 30% of our total book, and more than 80% is to our network customers. And we think that customers, our customers on that have actually have a relationship with us over many, many years. And we serve them in Singapore, in Hong Kong and also around the world where they have investments overseas, for example.

And in that sense, a lot of the real estates are secure. I think most of it, large part is secured at the weighted [Indiscernible] of the market [Indiscernible]. So in a way, the quality is good. It's just that we do expect weakness. We want to be more sure that we test the book accordingly. And you know that sometimes, when we provide a general provision, it is based on economic data, right? [Indiscernible] and so this is how we look at the commercial real estate portfolio. But in general, we see no systemic reset.

[Unknown Executive]

Any other questions?

[Unknown Analyst]

[Indiscernible] the average generation of your loans are annual billable for sales portfolio? Also how large is your AFS portfolio on your balance sheet. And last year, how much of your loan portfolio that is being repriced in the next [indiscernible].

[Unknown Executive]

Collins, do you want to take that?

[Collins Chin, executive]

Yes, sure. I mean in terms of the loan portfolio, I think much large will be prices every 3 months. It Is above the loan portfolio being roughly 90% in one we way or others on the floating rate on the source or -- and so and so forth.

[Pik Kuen Wong, executive]

With the shift to [Indiscernible], we'll be perhaps a shortening in the reprice.

[Collins Chin, executive]

Because the [indiscernible], yes.

[Chin Yee Goh, executive]

[Indiscernible] Are all your questions answered?

[Unknown Analyst]

[Indiscernible]

[Chin Yee Goh, executive]

Yes. So if you look at available for sale, we actually said that flat [indiscernible]. So we have EFS, probably old. Government gets secured [indiscernible]. 90% of that actually in terms of fair value to other property [Indiscernible]. And then on the side of the [Indiscernible] maturity are small.

And then you also asked about the sort of -- you asked how much [Indiscernible].

[Pik Kuen Wong, executive]

[Indiscernible]

[Chin Yee Goh, executive]

Yes, yes, [indiscernible]

[Unknown Analyst]

Yes, sure. [Indiscernible]. So I think I understand that you'll be explaining for the [Indiscernible], but what can [Indiscernible] the impact so far? And other [Indiscernible], we can extrapolate probably the introduction of the 16 cycle, but we are at -- sorry, many years ago 2019 compared to 2023. [Indiscernible] compared to now.

And my second question is about the sustainable loans book, right? So I know that you won't be shifting the SGD 50 billion target anytime soon. Why is that? And also, you mentioned that [indiscernible]. But I understand that it will contribute to the [ SGD 60 million ] target. So are there separate targets here? Are the separate focuses for a sustainable loan [indiscernible].

[Pik Kuen Wong, executive]

I think insurance, Chin Yee, you want to start [Indiscernible].

[Chin Yee Goh, executive]

Okay. For the insurance, with the adoption of SFRS 17, we were pulling forward, you'll see something from position of this year, we are seeing less volatility in terms of the revaluation, insurance assets and [Indiscernible]. Because with the adoption of SFRS 17, some of this portfolio, right, move from fair value to P&L, fair value [Indiscernible]. So the [indiscernible] no problem with the P&L segment, what we have seen last quarter. We have revaluation in mark-to-market loss. Yes, so that is one interest debt of the SFRS 17 adoption.

[Pik Kuen Wong, executive]

I think it's maybe the second part would be the change in how the income.

[Chin Yee Goh, executive]

Okay. Yes, yes. So yes, [Indiscernible] sort of mentioned the reason for the time line in our operating expenses, 4% for the group level compared to the new quarter.

One of the main reason was the cause of reclassification of GEH operating expenses relating to agency and sales commission as well as claims will be classified net of insurance revenue. So it disappeared on the operating expense line and moved up to be a net of the insurance revenue. So that's one-off effect [Indiscernible].

[Pik Kuen Wong, executive]

On sustainable financing, you're right, eco loans is not in our target of the dividend. But I illustrate that just to say that whenever we talk about supporting climate change are not supporting. We're seeing that we combating climate change or we want to have overall proposition. We talked quite a lot about supporting the corporate. We talk about supporting [indiscernible]. I just want to run enough to say that we also focus on the retail. And in a way, we also focus on ESG investment as well and how we look at our clients handling [Indiscernible].

So why I'm not changing that target yet is because I think through the number of years, we now know exactly how to make the best of it in handling -- in helping our clients to combat climate change. So we're very focused to continue to support our clients in many ways. In particular, we talked about -- I mean we are thinking about next year, right? And also about ourselves how we actually make ourselves in retail as [Indiscernible] as well.

So the target becomes something of that is always set and actually we -- reaching actually much earlier on. So I don't see a crucial -- this is a crucial stage to tell everybody now because we have 47 billion, we'll reset it.

What I'm saying is this becomes very business as usual to us, that we will continue to grow our sustainable financing, yes.

If we continue to grow like double digit every year, actually, that last quarter was at 30-something percent. And obviously, whatever target you set becomes a little bit just a number to be beaten.

[Unknown Analyst]

Can we get a view like a broad view from you on what's happening in the global banking sector right now? Like what happened in first [indiscernible] and how that's -- like Asian bank might also see what benefit from all this what's happening and the impact?

[Pik Kuen Wong, executive]

That's a very big subject. And I think we can miss so much from [Indiscernible] or the reports and all that. I think banking sector has always been evolving, right? And if you look at banking industry, it has very different stages over the decades. But I think that the last [Indiscernible] major impact was the financial -- the world financial crisis banking back in 2008, right?

So I think what happens in the regional banks in the U.S. does reflect on the problems created by very rapidly rising interest rate environment. And I think for banking, the lesson to learn is really whether you're too concentrated on the certain sector, whether your deposit banks is not diversified enough. And what are you investing on behalf of clients and on behalf of yourself that you have. Because we are in the business of managing that deposit and that liquidity, so I think these are all the important message.

And it's not just bank learning, it's really like government learning it, regulators learning about it as well, right? So in a way, of course, we ourselves do a lot of analysis. Whether there will be more banks having problems or we cannot tell we are not really active in that market. We're just mindful what if something continue to happen, how does that actually impact?

That's why I don't want to bring it up all again, but commercial -- I said commercial real estate, because that is a banking land to commercial real estate, right? But banks have a problem, of course. That reflects immediately on that. It's -- and then COVID has a lot of impact on production, manufacturing, health care and all that already.

So you look at it, what are the -- well, it's like coming back to COVID. Immediately, you look at hospitality. You look at traveling, right? You look at services because lockdown. So when we see something happening in other parts of the world, we immediately think about is that contingent effect to the rest of the world.

I think so far, the business sector play a bit. And I think government reacted really fast. And I think regulators in this region also come out to say something. And you could imagine, we also have a lot of communications with our regulators around the key markets, in particular, that we have more sizable operations.

So I can't predict what's going to happen next. But then again, over the years, in particular, after the IFC, the prices, and obviously banks, the way banks handle our business and look at risk and stress testing and capital become ever more of paramount importance.

And to an extent, I would say, you [indiscernible] bank has a higher capital and better liquidity management and the bank that does not have that in that sense.

So I think COVID does prove that what we have as a capital -- as our capital position was actually helped us to maintain, of course, our credit rating. And I think that credit rating doesn't come from contrasting that for the first half [indiscernible] are tripling, that's why the bank has to be doubling. It's not like that. It's because we really is managing our position very well, so that we can continue to support our customers through [Indiscernible] times.

[Chin Yee Goh, executive]

Maybe one last question?

[Unknown Analyst]

Do you have -- is it the end [Indiscernible] efforts by banking management. Can you mention the [indiscernible] last year that led to the stress into U.S. financial system.

[Pik Kuen Wong, executive]

We don't say every day thing. That is not every day thing, if you ask -- you have [indiscernible] in particular. It's an every day thing. But then with interest rate rising so much, there is so much more discussion involving everybody, right? In particular, how do you find how local as we want to grow? What is -- what other currencies that's -- are under more stressed out than the other currency, right?

And how does each -- actually interest rate hike doesn't impact every country the same, right? If you look at China, actually have a lower interest rate environment. Impact -- it impact or cycle differently as well. So -- and you talk about how do we manage our investments, which Chin Yee mentioned on that very last page, right? And do we adjust the duration? And do we adjust and put more into [ wholesale ] maturity, et cetera. So this is, as we said, a very constant discussion among all of that.

So -- and then in a way, how do you balance out your funding cost and leads to fixed deposit strategy, leads to CFS strategy, leads to how we attract customers. And it's also related to how do we protect ourselves in the SME field as well? It's important because SME deposits is actually more than 20% of our CASA. And these are very important customers because they really hold their operating cash review. And that means our digital offering has to be good so that they can manage their money very efficient.

[Chin Yee Goh, executive]

Okay, okay. [Indiscernible].

[Unknown Analyst]

[indiscernible]. Yes. So the [Indiscernible] is definitely growing over the last year. So what are some considerations behind this? And what is the impact of transitional [Indiscernible] on your CET1 because CET1 that's too high in the agreement, what this means to our dividends going forward?

[Pik Kuen Wong, executive]

Big question again. I'll start with why it grows? Why it grows is because we also grow our business. So we have both [Indiscernible], right? That's one thing, in particular. I think we bounced back from the COVID, [ year 2020 ], really bounced. So 2021, we're really close to a record high in 2019, and then we made a record high last year. So that's first thing is how we do business and engage our customers.

Second thing is we continue to manage our RWA very effectively. So part of the contribution to a high [Indiscernible] was because of that. Is it ever too high? Yes. We do have -- we do think that we can -- we need to operate our capital effectively efficiently, and we need to look at our shareholders as well. And that's why you see that we also commit to change our dividend policy. That means we have this dividend out at least 50% of the profit. And in the past, we're around 14 -- 40 something, right?

So that's already a move to make sure that we also look at our shareholders by distributing more from our capital. And of course, in market of uncertainty, you would genuinely want to hold on to a bit more. But I did talk about, hopefully, in the next shorts or medium-term goal will impact the use of the capital to bring it down, the CET1 to down to about 14%.

[Unknown Executive]

On that note, thank you, everyone, for joining us this morning. Thank you.

[Pik Kuen Wong, executive]

Yes. Thank you, everyone.

[Collins Chin, executive]

Thank you.