SINGAPORE (Aug 6): Oversea-Chinese Banking Corporation (OCBC Bank) surprised market observers with a higher-than-expected interim dividend payout of 25 cents per share for the 1H19 ended June, 25% higher than a year ago.
OCBC’s 2Q19 earnings rose 1% to $1.22 billion – some 5% above Bloomberg consensus expectation of $1.16 billion – on the back of stronger net interest margin (NIM) and loan growth.
Net interest income (NII) for 2Q19 grew 10% year-on-year to a record $1.59 billion, largely driven by a 4% increase in customer loans and a 12-basis-point y-o-y rise in NIM to 1.79%, attributed to increased asset yields in Singapore, Hong Kong and China.
This brings earnings for 1H19 up 6% to a new high of $2.45 billion, from $2.32 billion a year ago.
See: OCBC posts 1% rise in 2Q earnings to $1.22 bil; declares interim dividend of 25 cents per share
“We were more surprised by OCBC’s DPS of $0.25 than its 3bp [q-o-q] NIM expansion. Expect positive share price movement today from this,” says CGS-CIMB Research lead analyst Andrea Choong in a flash note on Aug 2, as the brokerage maintained its “hold” call OCBC with an unchanged target price of $12.59.
See also: Valuing vice stocks
Investors, however, did not share the optimism.
Shares in OCBC have slipped 3.5% since its results announcement before market open on Aug 2, falling 40 cents from $11.42 to $11.02 as at 3pm on Aug 6.
Maybank Kim Eng Research analyst Thilan Wickramasinghe notes that OCBC has raised its interim dividend, but says it is “not enough”.
See also: Investors turn positive on Venture Corp on share buybacks and higher revenue guidance of customers
“Assuming [the interim dividend] is at least matched in the final dividend, the total payout should come in around 46% - the highest since 2011 – resulting in a 4.4% 2019E yield, which is almost on par with the rest of the sector. However, OCBC has a high CET1 ratio of 14.4%,” Wickramasinghe says.
As at end June, OCBC’s Common Equity Tier 1 capital adequacy ratio (CAR), Tier 1 CAR and Total CAR rose to 14.4%, 15.1% and 16.8% respectively, up from the corresponding ratios of 13.2%, 14.3% and 15.9% a year ago.
Assuming a more comfortable CET1 level of 13.5% and 80% of the dividend is taken up as scrip, as has been the case historically, the analyst estimates that OCBC should have $5.9 billion of excess capital by end 2019E, accounting for around 12% of its market cap.
“[The excess capital] may be deployed for acquisitions,” Wickramasinghe says. “Management claims there are active opportunities they are considering, which raise significant execution and earnings visibility risks, in our view.”
Maybank is keeping it “hold” call on OCBC and lowering its target price by 2% to $11.05.
DBS Group Research analyst Lim Rui Wen notes that, despite the increase in interim dividend declared in 2Q, OCBC’s dividend yield continues to lag its peers’.
“We are of the view that OCBC’s dividend policy will continue to weigh on its near-term share price performance as management has maintained the need for strong capital levels amid volatile markets as well as for market opportunities – for instance, acquisitions – should they arise,” says Lim. “We are also cautious on execution risks in relation to acquisitions should they materialise.”
For more stories about where money flows, click here for Capital Section
DBS is keeping its “hold” call on OCBC with an unchanged target price at $11.50.
“A higher dividend payout ratio for OCBC, closer to its peers’ close to 50%, could be a re-rating catalyst,” Lim adds.
OCBC’s interim dividend payout will amount to approximately $1.08 billion, representing 44% of the group’s 1H19 net profit after tax.
On the other hand, Phillip Capital research analyst Tin Min Ying believes OCBC’s “robust” CET1 of 14.4% will “provide shelter the bank from trade war uncertainties and slowing global growth”.
“Surplus capital also provides opportunity for inorganic growth,” Tin says. “Heavier reliance on interest income and recurrent fees should provide stability and predictability to revenue and offset some of the impact from interest rate cuts.”
Phillip is keeping its “accumulate” rating on OCBC with a slightly lower target price of $12.50, from $12.70 previously.
Similarly, UOB Kay Hian analyst Jonathan Koh says the scrip dividend scheme will allow OCBC to “shore up capital buffer to weather external shocks and to seize opportunities to acquire should opportunities surface”.
The scheme will be applicable to the interim dividend, giving shareholders the option to receive the dividend in the form of shares.
The issue price of the shares will be set at a 10% discount to the average of the daily volume weighted average prices during the price determination period from Aug 15 to 16, inclusive.
UOB is keeping its “buy” call on OCBC with a target price of $14.48, down from $14.62 previously, based on a 2019F target price-to-book value (P/BV) of 1.4 times.
Meanwhile, RHB Group Research analyst Leng Seng Choon notes that the bank’s NII strength in 2Q19 was offset by weakness in profit from life insurance.
“2Q19 life insurance profit fell 26% y-o-y due to a decline in the discount rate used to value long-term insurance contract liabilities,” says Leng. “Overall, 2Q19 total non-interest income was flat y-o-y.”
RHB is maintaining its “neutral” rating on OCBC and raising its target price to $11.80 based on a 2020F target P/BV of 1.1 times.
According to Maybank valuations, OCBC is trading at an estimated price-to-earnings (PE) ratio of 10.2 times and a dividend yield of 4.5% for FY19E.
