Analysts from CGS-CIMB Research, DBS Group Research, Maybank Kim Eng, PhillipCapital, RHB Group Research and UOB Kay Hian have all kept their “add” or “buy” calls on Oversea-Chinese Banking Corporation (OCBC) following the bank’s results posted on May 7.
See: OCBC net profit surges to $1.5 bil for 1Q21 on higher non-interest income
For the 1QFY2021 ended March, OCBC reported a 115% y-o-y surge in group net profit of $1.5 billion, which surpassed consensus expectations.
All brokerages have also increased their target price estimates on the back of the strong performance reported by OCBC.
CGS-CIMB has pegged its target price on OCBC to $13.75 from $12.52 previously; DBS has upped its target price to $14 from $12.50; while Maybank Kim Eng has increased its target price to $14.17 from $12.74.
PhillipCapital has lifted its target price to $14.63 from $13.65; RHB has upped its target price to $14.30 from $13.30; while UOB Kay Hian is the most optimistic on OCBC with a target price of $15.50 from $15.05.
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To CGS-CIMB analysts Andrea Choong and Lim Siew Khee, there are several positives on the bank, including its connectivity between Singapore and Greater China, upside to its 33 basis point (bp) credit cost guidance and strong 15.5% CEI-1 position.
“OCBC sees ample opportunity in capturing business flows between ASEAN and Greater China, and credit growth of its network customers in the UK. Sectoral liquidity, such as in healthcare, transport and new economy sectors, will likely drive loan growth towards the mid-to-high single-digit range in FY2021 [compared to +0.5% in FY2020],” they write.
On the bank’s credit cost guidance, Choong and Lim estimate 25 bp in the bank’s credit cost guidance for FY2021 despite the bank’s decision not to write back management overlays of impairments just yet. “We think that the more positive asset quality trends provide upside to its 33 bp guidance,” they say.
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OCBC’s strong 15.5% CET-1 position – above its optimal target of 13.5% – gives room for mergers and acquisitions (M&A).
To Choong and Lim, any M&A exercise would likely take place in OCBC’s core markets and business pillars, and that Citibank’s consumer businesses could be a “good fit”.
On this, the analysts have upped their earnings per share (EPS) estimates for the FY2021 to FY2023 by 7% to 9% as they factor in “heightened wealth income levels and stronger fee income, keeping in mind that market volatilities could drag insurance and treasury income going forward”.
Choong and Lim have also raised their dividend estimate to 50 cents per share, in view of the Monetary Authority of Singapore (MAS) lifting its dividend cap in FY2021.
To the team at DBS, OCBC would be able to increase its dividend payout ratio perpetually, if there are no M&As on the horizon.
On the raised loan growth target, the team at DBS see opportunities coming from healthcare, infrastructure, logistics, real estate, transportation, new economy sectors, as they continue to be competitive in the Singapore mortgage space.
Like the analysts at CGS-CIMB, the DBS team believes OCBC’s management’s guidance for 100 to 130 bps of credit costs to end up at the low side of the range.
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“Assuming 1QFY2021’s ‘normalised’ specific allowances of 11bps special allowances, depending on economic outlook, credit costs may come below 100bps but management believes it is prudent not to do write back at this point in time as there are still risk events ahead given the resurgence of Covid-19 cases in some countries in the region,” writes the team.
The way Maybank analyst Thilan Wickramasinghe sees it, an improved loan growth outlook with stablised net interest margins (NIMs) should “support further operational growth, especially given its gearing to North Asia and Singapore”.
“Strong capital and allowances together with a better than expected asset quality backdrop could drive reserve write backs in 2HFY2021, we believe,” he writes.
To Wickramasinghe, the bank has strong underlying operational growth prospects.
“We think as economic activity strengthens, wealth, along with brokerage, loan fees and IB should see sustained growth. OCBC’s gearing to SG and North Asia (which contributes 65-75% of pre-provision operating profit or PPOP) should be an advantage as recovery takes hold.”
“NIMs seem to have stabilized and rising loan growth should keep them supported, in our view. Management claims that demand for loans from large Singapore corporates and North Asia is strengthening. We have raised FY2021-FY2023 PPOP by 3-7%,” he writes.
Wickramasinghe has also lowered FY2021-FY2023 credit costs by 1 to 7 bps as he sees “significant opportunities for upgrades”.
“Nevertheless, reserve write-backs, especially the significant management overlays established in 2020, are unlikely to be considered before 2HFY2021 when there is better clarity of regional herd immunity, we believe,” he adds.
To this end, Wickramasinghe has upped OCBC’s EPS estimates for the FY2023 to FY2023 by 6% to 12% based on the bank’s improved outlook.
“In our multistage dividend discount model or DDM (COE 8.4%, 3% terminal), we have raised mid-cycle dividend growth by 1-3% to reflect medium term delivery from OCBCs Greater China strategy and wealth platform,” he adds.
In addition to the higher target price, PhillipCapital’s senior research analyst Terence Chua has raised his earnings estimates for FY2021 by 5.6% on higher insurance and wealth income, as well as lower allowances.
“We now assume 1.27 times FY2021 price-to-book value (P/BV) in our Gordon Growth Model (GGM) valuation, up from 1.19 times as ROE improves from 9% to 9.5%,” he says.
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The Singapore research team at RHB have, likewise, upped their earnings estimates for the FY2021 to FY2022 by 6% to 8%. The higher estimates take into account the robust 1QFY2021 non-interest income and “tweaks in assumptions for loan growth and NIM”.
“Our target price is upgraded to $14.30 (from $13.30), based on a GGM-derived P/BV of 1.2 times – near +1 standard deviation or SD [of] the historical mean,” it adds.
UOB Kay Hian analyst Jonathan Koh sees loan growth picking up in the subsequent quarters as the US is benefitting from monetary and fiscal stimulus, while China is experiencing a pick-up in domestic consumption and exports.
The bank has also estimated that maintaining dividend payout at 40% to 50% would be able to support growth in risk-weighted assets (RWA) of 7-8% per year without impeding CET-1 CAR. Its management has also emphasised that its dividend policy must be “progressive and sustainable,” writes Koh.
“As such, we expect OCBC to gradually increase recurrent regular dividends (special dividends are unlikely). Having a high CET-1 CAR also helped OCBC weather unexpected economic shocks, which has been aptly demonstrated amid the Covid-19 pandemic,” he adds.
Koh has raised his net profit forecast for the FY2021 by 9% due to the quarter’s strong results and “organic growth in the treasury business”.
“Our target price of $15.50 is based on 1.28 times FY2022 P/B, derived from the GGM (ROE: 9.6%, COE: 7.75%, Growth: 1.0%).
Shares in OCBC closed 1 cent higher or 0.08% up at $12.57 on May 10.
