The team at RHB Group Research has kept a “buy” rating on OCBC Bank as it sees its valuation as “compelling”. Singapore’s transition to living with Covid-19 as an endemic, as well as its opening of the borders point to stronger earnings in the quarters ahead.
In its report dated April 18, the team has also kept their target price unchanged at $14.40.
Despite the positive outlook, the team gathers that OCBC will mark a softer quarter for the 1QFY2022 ended March due to the subdued demand for loans.
The bank will report its results for the quarter on April 29.
The lower demand is attributable to the greater caution seen among businesses with the pandemic’s Omicron variant dampening economic recovery as well as the Russo-Ukraine war. Residential mortgages have also slowed down due to the recent spate of cooling measures introduced by the Singapore government in December 2021.
That said, OCBC’s management is expected to maintain its guidance for mid-to-high single digit loan growth in FY2022, notes the team.
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In the meantime, the RHB team expects OCBC’s current account savings account (CASA) deposits to hold up, with rising rates in the US expected to lead to an outflow of funds.
“To date, OCBC has yet to see any material drop in deposits with excess liquidity parked in CASA deposits instead,” notes the team.
Next, net interest margins (NIM) are estimated to be stable, with benchmark rates in Singapore only on a gradual uptrend since late January 2022. That said, the positive impact from higher rates would only be more meaningful from 2HFY2022 or FY2023, according to the research team. “For 1QFY2022, the healthy CASA balances should help keep NIM stable,” says the team.
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OCBC’s asset quality is also seen to be resilient.
“Having cleaned up its loans in 4QFY2021, management has guided for normalised credit cost of 20-25 basis points (bps) in FY2022. With no signs of stress within its portfolio, provisions are expected to be meaningfully lower in 1QFY2022,” the team adds.
Meanwhile, the team is mixed on the outlook for OCBC’s non-interest income. The bank is seeing a strong pick-up in trading income from customer flows as the economic uncertainty has led to increased hedging activities, says the research team. On the flipside, fee income from wealth management would be lower q-o-q as most investors are staying risk-off while its insurance operations could be impacted by rising bond yields.
In other news, OCBC has completed the audit on the December 2021 phishing scam and implemented measures mandated by the Monetary Authority of Singapore (MAS) to bolster security.
The RHB team understands that the bank has not heard from MAS pertaining to any supervisory action like that of DBS Group as at the time of writing.
“Unlike peers, OCBC does not have a standalone digital bank. Instead, the bank has invested heavily on technology to ensure that it is able to provide offerings similar to those of digital banks,” says the team. “Management [will] closely monitor developments by digital banks to ensure that OCBC continues to effectively engage its customers.”
OCBC Wing Hang, which is headquartered in Shanghai, says its operations have not been materially impacted by the strict Covid-19 policies in China
As at 4.34pm, shares in OCBC are trading at 5 cents down or 0.42% lower at $11.98.
Photo: Bloomberg
