UOB Kay Hian (UOBKH), Maybank Securities, PhillipCapital, CGS International and Goldman Sachs have maintained their “buy” calls on Oversea-Chinese Banking Corporation (OCBC) after its 3QFY2024 ended Sept update.
Meanwhile DBS Group Research kept its “hold” call. Morningstar also maintained its “four-star” rating after the update.
Most of the analysts upgraded their target price except for Morningstar’s unchanged target price of $17.
UOBKH analyst Jonathan Koh has upgraded his target price to $21, up from $19.40 previously, while Maybank analyst Thilan Wickramasinghe lifts his target price to $17.89 from $17.01.
PhillipCapital analyst Glenn Thum raises his target price from $15.40 to $17, while DBS analyst Lim Rui Wen has upgraded her target price to $16.10 from $14.90 previously.
CGSI analysts Andrea Choong and Lim Siew Khee raise their target price to $17.70 from $16.70.
On Nov 8, OCBC reported that it delivered a net profit of $1.97 billion in 3QFY2024, representing a 9% y-o-y increase, supported by a surge in wealth management fees and a doubling of trading income. The bank also reported an annualised return of equity (ROE) of 13.8%.
OCBC’s net profit beat the estimates of the consensus, as well as the estimates of PhillipCapital, Maybank and UOB Kay Hian. In its report, UOB Kay Hian’s Koh noted that he forecasted OCBC to report a net profit of $1.91 billion for the 3QFY2024.
Fees grew 10% y-o-y in 3QFY2024, while contribution from wealth management jumped 16% y-o-y. OCBC’s wealth management assets under management (AUM) grew 5% y-o-y to $248 billion, driven by continued net money inflows of $5 billion this quarter.
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Trading income hit a new quarterly high of $508 million, representing a 135% y-o-y growth from higher customer flow. Customer flow treasury income grew 46% y-o-y to a record high $306 million, while non-customer trading income doubled q-o-q to $202 million.
Contributions from life and general insurance expanded 6% y-o-y to $233 million.
Non-interest income; non-interest margin
OCBC’s 3QFY2024 non-interest income recovered to contribute 36% of total income, compared to 28% a year ago.
Maybank’s Wickramasinghe thinks that this momentum should carry through to 4QFY2024 given market volatility, with the current positive momentum likely to drive market-to-market gains at Great Eastern.
As such, Wickramasinghe increases his FY2024 to FY2026 non-interest income assumptions by 3% to 4%.
Despite loan growth of 2% y-o-y, net interest margin (NIM) eased 9 basis points (bps) y-o-y and 2bps q-o-q due to liquidity deployed in lower-yielding high-quality bank placements and debt securities and higher funding costs.
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Net interest income (NII) was flat on a sequential basis but dipped slightly by 1% y-o-y as funding costs led to NIM being compressed further to 2.18% this quarter.
According to Morningstar analyst Michael Makdad, this is in line with other Singaporean banks and Hong Kong banks operating in Singapore.
Loans growth was led by a growth in corporate loans and mortgages in Singapore, Malaysia, UK and Australia.
OCBC has lowered its FY2024 NIM guidance to 2.2%, from 2.2% to 2.25% previously.
CGSI’s Choong and Lim believe that there could still be some NIM compression to come in 4Q2024F before stabilising, given its exit NIM of 2.16% at end 3QFY2024.
PhillipCapital’s Thum expects NIM compression to continue as more rate cuts happen and for a recovery in loan growth to stabilise NII.
Maybank’s Wickramasinghe notes that “with the potential for higher-for-longer interest rates under a new Trump administration, there could be upside risks to NII.”
“Concurrently, management is seeing a pick-up in loan activities, especially in Asean. Improving loan growth, could provide more offsets for margin weakness,” Wickramasinghe adds.
Goldman Sachs expects OCBC to “maintain resilient performance” in the rate cut environment with its proactive management in NII and strong momentum in non-NII.
Operating expenses
Operating expenses rose 9% y-o-y to $1.46 billion in 3QFY2024 due to increased business activities and digitalisation initiatives.
OCBC recognised integration costs of $15 million related to the acquisition of Bank Commonwealth in Indonesia, while cost-to-income ratio was 38.5% in 3QFY2024.
Non-performing loan coverage; active capital management
Non-performing loan (NPL) ratio was unchanged at 0.9% in 3QFY2024, OCBC recognised one real estate company in Hong Kong as NPL.
“Nevertheless, NPLs declined 4% q-o-q due to higher recoveries and upgrades. Provisions were 8% lower y-o-y at $169 million. OCBC has cut its exposure to office properties in Hong Kong by 50% over the past one year,” UOBKH’s Koh says.
OCBC has set aside pre-emptive general provisions of approximately 17 basis points (bp) in 3QFY2024 for credit profile changes of watchlist accounts in Hong Kong.
“While sectoral stresses were not highlighted, the elevated net new non-performing assets in 3Q2024 was due to the downgrade of real estate exposure in Hong Kong, which was largely secured, and therefore did not require substantial provisions,” CGSI’s Choong and Lim note.
That said, OCBC remains firm on FY2024F credit costs around the 20bp range.
DBS’s Lim remains “watchful” for asset quality risks as interest rates stay high, especially for the commercial real estate (CRE) sector, which has seen weakness.
“A credit cycle could derate the sector,” Lim says.
OCBC has maintained a 1HFY2024 dividend payout ratio of 50%, similar to 1HFY2023.
“We believe more active capital management could rerate the stock further, “ DBS’s Lim adds.
UOBKH’s Koh notes that OCBC appears cautious on capital management as existing surplus capital is needed to provide capacity for inorganic expansion and buffer for weather uncertainties.
Capital returns
OCBC is aiming for a medium-term Common Equity Tier 1 capital (CET1) of 14%, compared to the current 17.2% from BASEL4 transitional uplift.
CGSI’s Choong and Lim estimate around $2.5 billion in excess capital, implying a potential return of 55 cents DPS.
Maybank’s Wickramsinghe expects CET1 to be 15.6% when BASEL4 is fully phased in, implying $4 to $7 billion in excess capital.
Unlike DBS or UOB, OCBC management has played down the possibility of any buyback announcement, Morningstar’s Makdad notes.
According to Maybank’s Wickramasinghe, “management claims a preference for dividends over share buybacks, but without a clear indication of how much higher this could be above its 50% payout guidance.”
“This uncertainty could be an overhang for the stock, we think,” Wickramasinghe adds.
Conversely, while Morningstar’s Makdad acknowledges that OCBC management will be “under pressure” to make clear its capital allocation plans at year-end results, he is of the opinion that investors could be “satisfied without repurchases”, if OCBC were to release capital through special and/or increased regular dividends or announce value-enhancing acquisitions.
Looking ahead
Maybank’s Wickramasinghe has “generously raised” 2024 to 2026E dividend per share (DPS) assumptions by 2%-4% given strong operational performance.
PhillipCapital’s Thum raises FY2024e earnings by around 8% from higher trading income and lower provision estimates, while expecting 4Q2024 earnings to grow by around 21% y-o-y from double digit fee and trading income recovery with provisions stable.
DBS’s Lim revises FY2024 to FY2026F earnings by 5%, largely due to changes in non-interest income and NIM assumptions.
Shares in OCBC closed 21 cents higher or 1.29% up at $16.47 on Nov 14.
