OCBC Bank has enjoyed a “decent start to FY2022”, and analysts are staying “buy” on the bank’s stock.
OCBC Bank’s 1QFY2022 results are within expectations, writes the team at RHB Group Research. Management remains cautious on its FY2022 guidance, given the recent change in economic conditions.
That said, the RHB team has trimmed its target price for OCBC Bank to $13.90 from $14.40 previously, while maintaining “buy” on the stock in a May 4 note.
“We trim our target price due to a higher risk premium and after tweaking its ESG score to 3.1 (from 3.2) — as we recalibrated the assessment of risks and regulatory requirements associated with data and cybersecurity. At a current P/BV of 1.1x, the stock’s risk-reward ratio remains compelling,” the team writes.
OCBC’s 1QFY2022 net profit of $1.36 billion (up 39% q-o-q, down 10% y-o-y) was at 24% of RHB’s FY2022 forecast and 25% of consensus forecasts.
While acknowledging near-term headwinds from the Russia-Ukraine war, the China lockdown and rapid rise in inflation, OCBC believes Asia will remain resilient, helped by the reopening of economies. Loans grew 1.4% YTD or an annualised 5.6% in 1QFY2022. “Loan growth is expected to gain momentum in 2H2022, as was the case in FY2021,” says the team.
See also: Almost in sync, all three Singapore banks report y-o-y earnings drop of 10% for 1QFY2022
OCBC expects net interest margin (NIM) at between 1.55-1.60% in FY2022, a slight upgrade from its earlier guidance of 1.50-1.55%. “Management is conservative in its guidance, as it sees some uncertainty in the transmission of US interest rate hikes to Singapore’s benchmark rates. Hence, NIM could surprise on the upside. The bank estimates that a 100 basis point (bps) hike in the US rates would add $670 million to net interest income (NII) and 14bps to NIM,” notes RHB.
While OCBC did not provide specific guidance on non-interest income growth, management plans to increase the hedging of its investment portfolio to mitigate the impact of non-customer treasury flows, says RHB.
With investors cautious over risks of recession, it sees challenges to the expectations for double-digit growth in wealth management fees. The wealth management unit contributes approximately 50% of net fee income.
See also: OCBC posts 10% y-o-y earnings dip for 1QFY2022 on softer fee income
OCBC’s loan book remained resilient in 1QFY2022 with no material weakening, says the RHB team. Non-performing assets (NPA) dipped 0.7% q-o-q, nudging NPL ratio to 1.4% from 1.5% in Dec 2021, while NPA coverage was at a comfortable 91%. “Still, management is sticking with its credit cost guidance of 20-25bps for FY2022F, preferring to be cautious. We cut FY2022-2024F net profit by 4-5% after factoring in lower NIMs, non-interest income and higher provisions.”
Meanwhile, DBS Group Research analysts Paul Yong, Lim Rui Wen and Tabitha Foo are maintaining “buy” on OCBC with a target price of $15.
In a May 4 note, they write that OCBC is “poised for growth”. “We believe there is further room for OCBC’s share price to re-rate, as we continue to expect economic recovery and look forward to a higher interest rate environment, which should bode well for OCBC’s NIM.”
They add: “Coupled with a new three-year corporate strategy focused on driving growth and building on their strengths, they expect to grow income and profits by more than 10% CAGR as well as loans by more than 10%.”
With the bank’s strong capital position, DBS analysts think there may be higher dividends on the horizon. “Higher dividends may also be a potential share price catalyst, given that in the absence of M&A activities, the common equity tier-1 (CET-1) ratio of 15.2% is above the optimal operating level. Management has shared that they will not be limited by their target dividend payout ratio range of 40-50% and that their optimal CET-1 ratio is 12.5-13.5% in the longer term.”
As at 9.05am, shares in OCBC are trading 40 cents lower, or 3.24% down, at $11.95
