Analysts are keeping their estimates largely unchanged for OCBC after the bank reported its 3QFY2023 ended Sept results on Nov 10.
During the quarter, OCBC reported a net profit of $1.81 billion, 21% higher y-o-y and 6% up q-o-q. The bank’s net profit for the 9MFY2023 was brought to a record $5.4 billion, 32% higher y-o-y.
The bank’s total income for the 3QFY2023 rose by 13% y-o-y to $3.43 billion, which was boosted by y-o-y growths in both its net interest income (NII) and non-interest income.
During the 9MFY2023, total income rose by 24% y-o-y to a record $10.23 billion.
At the bank’s results briefing, CEO Helen Wong said that she was “very glad” and that the bank was “quite happy” of the “good numbers”.
“[The] performance continues to reflect where we are, what we are in banking, insurance and wealth management,” she added.
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PhillipCapital analyst Glenn Thum was equally pleased. The analyst has kept his “buy” call and an unchanged target price of $14.96 as the bank’s 3QFY2023 estimates came slightly above his estimates. Thum’s target price is based on FY2023 P/BV of 1.29x and a return on equity (ROE) estimate of 10.8%.
The analyst has also kept his FY2023 estimates intact, although he is anticipating to see NII growth in the FY2024 driven by stable net interest margins (NIMs) and rising loans amid stabilised rates. During the year, Thum is also expecting the bank’s fee income recovery to boost its earnings.
“OCBC is our preferred pick among the three banks due to attractive valuations and dividend yield of 6.6%, buffered by a well-capitalised 14.8% Common Equity Tier 1 (CET-1) ratio, and fee income recovery from China’s re-opening,” he says.
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OCBC has also remained the top pick for RHB Bank Singapore and Citi Research even though both brokerages have kept their “neutral” call.
The RHB team likes OCBC for its strong asset quality metrics above the rest, which is a “potential differentiating factor in a higher-for-longer interest rate environment”.
It has also kept its target price of $13.70 as the bank’s 3QFY2023 and 9MFY2023 earnings stood in line with its expectations.
“Despite the improvement in non-performing loans (NPL), it raised loan coverage levels further, and this should keep the group in good stead,” says the team.
It adds: “Management also fine-tuned its FY2023 guidance (overall return on equity or ROE expectations [are] unchanged), while more details on the FY2024 outlook will be shared [at the 4QFY2023 briefing].”
To the team, a higher-for-longer rate may keep the bank’s NIM elevated although this may come at the expense of loan growth and asset quality.
“Hence, FY2024 credit cost should be higher vs that of FY2023, but not by a significant quantum,” it says.
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Citi Research analyst Tan Yong Hong has also kept his target price of $13 as the bank’s results came within his expectations.
“[The] market [is] likely overly focused on exit NIM as OCBC had to replace additional tier 1 (AT1) they have redeemed with interest-bearing deposits. Taking a step back, AT1 is below CET-1 and coupon payments are paid out of capital,” he writes.
“We view OCBC’s redemption of AT1 post stress-testing portfolio as a mark of confidence by management on capital. Singapore banks have guided that NIMs have peaked. Further, OCBC has 1.3x multiplier to RWA for operational risks which has been lifted, and this will add [around] 30 bps of capital,” he adds.
Noting OCBC’s improved CET-1 ratio, Tan sees that the bank is in a “strong position” to defend its dividend payout ratio of around 50%.
Despite his “neutral” rating due to the likely possibility of a recession in the US in FY2024, Tan sees that OCBC is likely to distribute higher dividends during its 4QFY2023 earnings announcement.
“We view OCBC's dividend policy as providing more predictability heading into 4QFY2023 earnings,” he says.
While DBS Group Research analyst Lim Rui Wen has kept her “hold” call like her peers, she is less upbeat on OCBC’s outlook even though the bank’s results stood largely in line with the estimates of the consensus.
The analyst sees limited catalysts for the bank for now as the US Federal Reserve’s rate cycle nears its peak. She also believes that OCBC’s NIM has peaked in the 3QFY2023 despite its q-o-q improvement, with “limited headroom for loan repricing” in the 4QFY2023.
OCBC’s exit NIM in September was 2.23%. This was partly impacted by one-off, higher wholesale funding costs.
“As the Fed rate comes close to the peak in this cycle, we believe the bulk of the banks’ share price re-rating from higher interest rates is over,” Lim writes.
She adds that the bank may see further downside risks after management lowered its loan growth guidance for the FY2023 to low single digit, down from its previous guidance of a low- to mid-single digit growth.
“We continue to be conscious of any further potential weakness in loan growth amidst the macroeconomic uncertainty. In addition, while recoveries and write-offs more than offset new non-performing asset (NPA) formation during 3QFY2023, we remain watchful for asset quality risks, as interest rates continue to remain high,” she says.
Lim’s unchanged target price of $13.70 is based on 1x FY2024, below -0.5 standard deviation (s.d.) of OCBC’s historical 12-year average P/BV (one year forward).
“We believe this is a fair valuation, as we see limited catalysts ahead for OCBC’s share price with rising asset quality risks. We believe the market has largely priced in OCBC’s active capital management and the downside to OCBC’s share price will be supported by its strong provisions buffer of 139%,” she says.
Meanwhile, the analyst has revised her forecasts by 1% to 2% for OCBC’s FY2025 earnings largely on credit cost assumptions.
UBS analysts Aakash Rawat and Benjamin Tan are also “neutral” on OCBC with a target price of $12.97.
They have, however, raised their FY2024 and FY2025 wealth management fee estimates by 6% to 20%, which represents a 25% to 32% y-o-y growth.
“This leads to a 1% to 4% earnings per share (EPS) upgrade for DBS and OCBC,” they write.
“Despite higher forecast for wealth management fees, we revise our EPS forecast for UOB lower by 1% to 3% in FY2024 to FY2025 driven by the results miss in 3QFY2023. We raise our price targets by 0% - 2% on the back of the EPS changes.”
On card fees, the other driver of fee income, UOB announced earlier this month plans to grow its card business with two global partnerships a year, following successful tie-ups with concerts by Taylor Swift and Ed Sheeran here next year. Would OCBC have similar plans in store?
At the briefing, Wong noted that the bank is "indeed working on lifestyle [elements]" although she stopped short of revealing more information. “You’ll see it when we announce it.” - with additional reporting from Jovi Ho
Shares in OCBC closed 7 cents lower or 0.54% down at $12.88 on Nov 15.
