JP Morgan analysts Harsh Wardhan Modi, Daniel Andrew Tan and Gaurav Khandelwal have kept their “underweight” call for Oversea-Chinese Banking Corporation (OCBC) O39 as they see downside to the bank’s earnings for the 1QFY2023 ended March 31.
OCBC will be reporting its quarterly results on May 10.
The analysts add that the stock is “at risk of weakness” over the next three to six months as the economy slows. To this end, they have lowered their target price to $11.50 from $13.50 previously.
The analysts’ report on May 5 comes after Great Eastern’s results for the 1QFY2023 ended March 31 on the same day. To them, the insurance group’s performance stood “soft”, which suggests a downside of around 4% to OCBC’s earnings.
Great Eastern G07 , a member of the OCBC Group, saw its 1QFY2023 earnings grow by 10.9% y-o-y to $244.0 million. The figure accounts for 12% of the analysts’ 1QFY2023 earnings estimates for OCBC, they note.
This is lower than the average contribution of 16% in the last eight quarters, which doesn’t count Great Eastern’s “weak” showing in the 4QFY2022, they add.
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Furthermore, the insurance group’s operating trends were weak with total weighted new sales (TWNS) declining by 22% y-o-y, driven by lower single premium sales in the Singapore market.
Great Eastern’s new business embedded value (NBEV) fell by 11% y-o-y due to lower sales from Singapore.
“There are limited further details, but mark-to-market likely normalized from the sharp miss in 4QFY2022, which was due to inversion of the yield curve in Singapore,” the team writes.
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“Along with Bank of Ningbo’s 2% - 3% miss and OCBC NISP’s in line earnings, we now have almost 40% of OCBC earnings disclosed, with numbers tracking weak and suggesting 6% - 7% downside,” the team adds. “UOB’s and DBS’s results went opposite ways, but both suggest a peaking of operating profit drivers, particularly net interest margin (NIM), as well as weak growth.”
In the analysts’ view, OCBC’s weaker asset quality should be the “largest driver” of its stock price moves.
“Any indication of non-performing loan (NPL) formation would be a catalyst for sharp de-rating. Yet if the bank is able to manage [its] asset quality well over the course of FY2023 – FY2024, the stock could re-rate sharply,” they write.
“OCBC has the least leverage among the three banks, which is a major overhang on the relative performance of the stock. The shift in capital management to ‘around 50% payout’ and a payout of 53% in FY2022 go a long way in addressing some of the concerns,” say the analysts.
“Even if the bank slows down capital accumulation, the current stock of excess capital remains. We believe the only way these can be used is via a large mergers and acquisitions (M&A) transaction; otherwise [its] return on equity (ROE) is likely to stay subdued,” they add.
As such, the analysts are expecting upside for OCBC to be capped. Even if the bank were to announce a transaction (with its excess capital of $6 billion assuming a 12.5% limit), its share price movements would be a “function of pricing and fit”.
Shares in OCBC closed 40 cents lower or 3.16% down at $12.25 on May 8.
