Analysts are all keeping their “add” and “buy” calls on Oversea-Chinese Banking Corporation (OCBC) O39 after the bank reported its results for the FY2022 ended Dec 31, 2022, on Feb 24.
In its results statement, OCBC announced that it intends to pay a final dividend of 40 cents per share, bringing its full-year dividend to 68 cents or 53% of its total earnings.
Despite the significant expansion in its net interest margin (NIM) that boosted the bank's net interest income (NII), OCBC’s core net profit for the 4QFY2022 stood lower than the expectations of the consensus due to lower profits from its insurance arm, Great Eastern Holdings.
OCBC's final dividend stood ahead of the market's expectations, which estimated that the bank would pay 38 cents per share.
Analysts are also positive about the clarity of OCBC’s dividend policy, where the bank will target a payout ratio of 50% going forward.
DBS Group Research analysts Lim Rui Wen and Tabitha Foo have kept their “buy” call as they see a “sustained dividend ahead” for the bank.
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However, the analysts have lowered their target price to $14 from $15 previously. Their new target price is equivalent to FY2023’s P/BV of 1.1x, which is slightly below OCBC’s average 12-year forward P/BV multiple.
While OCBC’s 4QFY2022 results missed their estimates, the analysts note that the bank has “benefitted significantly from enhancing its franchise value post its acquisition of Wing Hang Bank in 2014, given that Greater China continues to be management’s focus as a key market outside Singapore, contributing 13.3% of the group’s income in FY2022.
“The bank aims to capture rising Asian wealth and support increasing Mainland China-HK and Asean-Greater China flows to deepen its regional presence and drive sustainable growth,” they add.
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In FY2023, Lim and Foo say they continue to expect a sequential expansion in OCBC's NIM “albeit at a slower pace”. This is as deposit costs start to catch up with management confident of delivering an FY2023 NIM of around 2.1%.
Non-interest income is also expected to see a recovery in fee income from a lower base in FY2022, especially wealth management fees, the analysts add.
On the lifted dividend for the 4QFY2022 and the new dividend payout ratio policy, the analysts note that OCBC has “ample capital that can be returned to [its] shareholders via dividends, amongst others” with its Common Equity Tier 1 (CET1) ratio at 15.2% as at 4QFY2022. In addition, further optimism surrounding risk-weighted assets (RWA) will help improve the company’s capital ratios in FY2023, the analysts note.
“Lower-than-expected credit costs could drive OCBC’s earnings while sustained deliveries in return on equity (ROE) could boost its share price. OCBC’s strong non-performing assets (NPA) coverage of 114% is likely to limit the downside risks and provide share price support,” they write.
However, deteriorating asset quality is a key risk to the bank’s prospects, in Lim and Foo’s view. To them, larger-than-expected non-performing loans (NPLs), high inflationary pressures, and recessionary risks could unwind expectations of credit cost and NPL declines, thus posing risks to earnings.
UOB Kay Hian analyst Jonathan Koh has also kept his “buy” call with a higher target price of $18.25 from $17.75 previously
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To the analyst, the bank’s results for the 4QFY2022 brought in a “new regime of certainty for [a] higher payout”.
OCBC’s net profit of $1.31 billion for the quarter, however, stood below Koh’s forecast of $1.50 billion.
In addition to his target price, Koh has upped his earnings forecast by 3% for FY2023 due to the continued rapid NIM expansion in 2HFY2022 and lower credit costs of 22 basis points (bps) in FY2023 from 27 bps previously.
CGS-CIMB likes OCBC's 'firm' dividend payout policy
CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have also kept their “add” call as they like OCBC’s “firm” 50% dividend payout policy.
That said, the bank’s 4QFY2022 core net profit came in 20% below their estimates.
“We expect neutral share price momentum given the firmer dividend guidance, which could compensate for the earnings miss,” they write.
In a separate report issued after OCBC’s earnings briefing, the analysts kept “add” but with a lowered target price of $13.50 from $13.70 previously. The lower target price was due to the analysts' lowered expectations for OCBC’s insurance income. The estimate is said to be "more conservative given mark to market (MTM) swings.”
The lower target price also factors in the bank’s higher operating expenses (opex) growth in FY2023 to FY2024.
In addition, the analysts have lowered their earnings per share (EPS) estimates for FY2023 to FY2024 by 5% to 8% for the same reasons.
On the rate hikes and tapering off later into FY2023, the analysts note that while the more recent Fed rate hikes support some residual NIM expansion in the 1HFY2023, OCBC’s NIM could taper off below its current levels in the 2HFY2023 with continued current account savings account (CASA) outflow into other higher-yield instruments.
“As OCBC’s guidance does not pen in a Fed rate cut in FY2023, the bank is focusing on locking in asset yields, especially given the modest growth environment. Factoring in the rate trajectory above, we adjust our NIM estimates to 2.1%-2.2% in FY2023-FY2024 (from 2%-2.1% previously),” they write.
At its earnings briefing, OCBC’s management revealed that they would not rule out a higher dividend payout depending on its business performance and its capital position.
“On a pro-forma basis, we estimate over $2 billion in excess capital given the 14% target – which we believe would be comfortable for a higher dividend payout,” write Choong and Lim.
“Other targets outlined for FY2023 are mid-single digit loan growth (as the bank targets high-quality customers to guard against potential asset quality issues), NIM [in the region of] 2.1%, and ROEs above 12% (FY2022: 11.1%),” they add. “We think that wealth management could present earnings upside potential as market volatility stabilises.”
Finally, Citi Research analyst Tian Yafei has kept “buy” on OCBC with an unchanged target price of $14.60 though the bank’s 4QFY2022 net profit also missed her expectations.
However, like the rest of her peers, Tian is positive on the clarity of OCBC’s dividend policy.
In her report following OCBC’s earnings briefing, Tian notes that the bank’s management continues to be “conservative” and behind its peers as they kept their NIM guidance for the FY2023 at 2.10% despite their NIM of 2.34% as at the 4QFY2022.
“This is driven by policy rates stabilising in 2HFY2023 and higher cost of funds with limited upside from loan yields. CASA ratio should trend lower with 4QFY2022 CASA ratio -4.3 percentage points to 51.8% driven by higher fixed deposits (FDs) and lower CASA balance. Every 100 bps higher policy rate would add $740 million to NII,” Tian writes.
To her, key downside risks that could cause OCBC shares to trade below her target price include the extent of the impact of the US and global economies as well as Hong Kong and China’s economies on Singapore’s GDP growth, as well as rates and growth for loans and fees.
The Monetary Authority of Singapore’s (MAS) exchange rate policy, the level of short-term interest rates, shape of the yield curve and funding conditions, which impacts NIMs could also affect OCBC’s shares negatively.
Other risks that could pose upside or downside effects for OCBC include changes to asset quality outlook as well as the credit cost cycle, capital flows and market liquidity risk appetites, dividend policies and capital management, mergers and acquisitions (M&A) and regional growth, China’s policies, changes in OCBC’s management, as well as the outcome of Covid-19, says Tian.
Shares in OCBC closed 7 cents higher or 0.56% up at $12.50 on March 3.
