Analysts are mixed on Oversea-Chinese Banking Corporation (OCBC) O39 after it reported a record set of earnings for the 1QFY2023 ended March 31. The bank’s quarterly earnings stood at a record of $1.88 billion, which was up by 39% y-o-y and 44% q-o-q.
UOB Kay Hian analyst Jonathan Koh is the most upbeat among the analysts featured with his unchanged “buy” call and higher target price of $17.32, from $16.80 before.
He has also raised his earnings forecast by 3% for FY2023 after factoring in the strong 1QFY2023 performance.
In his May 11 report, Koh notes that the bank’s quarterly net profit stood “significantly above” his forecast of $1.71 billion as well as the consensus’ estimate of $1.59 billion.
Other positives include the green shots of recovery for the bank’s fee income, stable contributions from its insurance business, cost-to-income ratio of below 40%, as well as benign asset quality. However, the analyst also points out that the bank’s net interest margin (NIM) has plateaued. Management had also guided for a low- to mid-single-digit loan growth for FY2023, down from its previous guidance of mid-single-digit growth.
The Singapore research team at RHB Bank Singapore has also kept its “buy” call albeit with a lower target price of $14 from $14.80 previously.
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“OCBC Bank’s 1QFY2023 results are above expectations. Although loan growth guidance has been pared down – given the economic uncertainty – management was a bit more positive on NIM outlook,” the team writes in its May 11 report.
“Upside risk to earnings would come from its wealth management business, which is seeing healthy net new money inflows, and a rebound in cross-border flows premised on China’s reopening. Its current valuation of 1.0x P/BV, against a return of equity (ROE) of 12.5%, is compelling,” it adds.
Like UOB Kay Hian’s Koh, the RHB team has also raised its FY2023 – FY2024 net profit estimates by 2% to 3% mainly on revisions to NIM and operating expenses (opex).
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CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have also kept their “add” call with an unchanged target price of $13.50 as OCBC’s earnings also surpassed their expectations.
“1QFY2023 earnings were bolstered by sequentially stronger insurance, wealth and trading income, as well as lower opex,” they note in their May 11 report.
They add that the bank was also a beneficiary to the flight to safety trend where assets under management (AUM) rose 4% q-o-q to $270 billion.
With OCBC’s dividend payout ratio of 50%, the amount translates to a dividend yield of 6%, which Choong and Lim find attractive. To this end, the analysts see the counter as a yield play for investors.
“OCBC’s aim to bring its common equity tier 1 or CET1 ratio towards 14% in the short- to medium-term translates into $4.4 billion of excess capital, making the case for higher dividends/share buybacks if not used for mergers and acquisitions,” they say.
Meanwhile, they note that NIMs have likely peaked.
“We make no changes to our 2%-2.17% FY2023-FY2025 NIM forecasts as we believe management’s previous guidance was a tad conservative. Given the renewed guidance, we think NIMs could trend downwards to 2.1% in 4QFY2023 (from 2.3% in 1QFY2023),” they write.
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At the same time, analysts from Citi Research, DBS Group Research and Maybank Securities have retained their “hold” and “neutral” calls.
Citi Research analyst Tan Yong Hong has kept his target price at $12.20 while DBS’s Lim Rui Wen and Tabitha Foo maintained their target price at $13. Maybank’s Thilan Wickramasinghe lowered his target price to $13.19, down from $13.58 previously.
“Any fed rate cut would be the key downside risks,” says Citi’s Tan, adding that the downgraded loan growth guidance means that trade loans could take a longer time to recover. At the same time, the bank’s mortgage portfolio may see moderation.
“Overall, there could be low-single digits upside to net interest income (NII) offset by lower non-interest income, but mid-single digits earnings upside from lower opex,” he writes.
DBS’s Lim and Foo see limited catalysts to OCBC’s share price for now as the Fed rate cycle nears its peak, thereby bringing further downside to the bank’s NIMs.
“While OCBC’s 1QFY2023 NIM held up well at 2.30% (-1 basis points or bps q-o-q), management guided that NIM has likely already peaked and will trend downwards for the rest of the year, with FY2023 NIM at 2.2%,” they write.
In addition, they see further downside risks to the stock, with asset quality risks possibly emerging.
“Management’s FY2023 loan growth guidance was revised downwards in 1QFY2023 to a low- to-mid-single digit (previous: mid-single digit). While asset quality remains benign in 1QFY2023, we believe management will top up general provisions as it guides for a more normalised credit cost of 15 bps - 20 bps in FY2023 in a more uncertain environment,” they add.
Though OCBC’s results were ahead of Maybank’s Wickramasinghe’s expectations, the analyst sees several negatives in his outlook.
“Rising funding costs and limited opportunities to grow loans could cause NIM trajectory to turn negative. Fee income, led by wealth management, could provide some offset. On the other hand, benign credit quality conditions are likely to face pressure in the current slower growth and high interest rate environment. This may drive higher credit charges,” he writes.
Calling the bank’s asset quality a “critical known unknown”, the analyst adds that the current mix of slower macro and higher rates are likely to drive asset quality lower in 2HFY2023.
“Credit charges were 12 bps in 1QFY2023. We forecast these to increase to 17 bps – 26 bps in FY2023 – FY2025 from higher specific provisions and management overlays,” he says.
Shares in OCBC closed 11 cents higher or 0.91% up at $12.25 on May 19.
