Citi Research analyst Tan Yong Hong is “warming up to OCBC” going into results season for the three local banks, as he sees “some near-term upside on dividends” and the promise of further details on OCBC’s $3 billion incremental revenue strategy, first announced on July 3.
While Tan maintains “neutral” on OCBC in a July 19 note, he ups his target price to $12.70 from $12.50 previously.
Tan’s call on OCBC puts it in a better light than fellow local bank DBS; he keeps his “sell” call on Singapore’s largest bank by assets, but ups his target price to $27.10 from $26.60 previously.
Citi Research has stopped covering United Overseas Bank (UOB) since 2022, when UOB acquired Citigroup’s consumer banking units in Malaysia, Thailand, Vietnam and Indonesia.
UOB is set to announce its results for 1HFY2023 ended June on July 27, while DBS will do the same on Aug 3 and OCBC on Aug 4.
Over the past week, expectations for net interest margin (NIM) expansion on robust Hong Kong Interbank Offered Rate (HIBOR) drove crowding into DBS, writes Tan.
See also: Ahead of 1HFY2023 results, OCBC is UOBKH's top pick among local banks
Among Singapore banks, Tan believes valuations between DBS, at 1.4x price-to-book (P/B), and OCBC, at 1x P/B, should narrow. “We believe the market’s lookout for possible earnings risks should cap upside.”
Key focus areas for banks’ upcoming results include possible revisions to management guidance and OCBC delivering on its payout policy and giving clarity on its $3 billion incremental revenue strategy, says Tan.
OCBC, at below 1x P/B, could see incremental allocation and drive some re-rating should it deliver on dividends, adds Tan.
OCBC to pay 40 cents DPS?
Tan expects OCBC to declare a 1HFY2023 dividend per share (DPS) of 40 cents. He also sees upside from a “robust capital position”, supported by one-off $4 billion-$5 billion of risk-weighted assets optimisation in FY2023, which adds some 30 basis points (bps) to capital.
Having a 50% payout ratio for 1HFY2023 dividends should help convince the market of OCBC's commitment to capital management and lead to incremental positioning, he adds, as OCBC’s management has in the past remained less clear on payout ratio despite having a robust capital ratio.
OCBC’s upside from loan volume could offset a NIM contraction, says Tan. “Loan mix has relatively lower Greater China but more Asean exposure.”
Meanwhile, Hong Kong and Singapore system-wide loans are still soft, he adds. “Clarity on $3 billion incremental revenue uplift over FY2023-2025 can drive earnings upgrade and DPS. If both messages are delivered (dividends and revenue uplift), we expect valuation gap to close with DBS (trading at 1.4x). At 0.97x P/B, the market has little expectations for OCBC to surprise on the upside.”
Why OCBC has yet to privatise Great Eastern
OCBC’s acquisition of Great Eastern (GEH) shares on June 19 to 88.4% sparked investors’ debate on a possible privatisation offer, which could dent the bank’s ability to raise dividends.
See also: RHB downgrades OCBC to 'neutral' with lower NIM, net profit forecast
For OCBC to take over and privatise GEH, OCBC has to secure at least 90% of GEH’s shares. “In our view, OCBC will continue to acquire GEH when the opportunity arises based on a willing-buyer/willing-seller basis and trigger a mandatory delisting when shareholding crosses 90%,” writes Tan.
OCBC last acquired 685,400 shares at $24.90 per share for $17.07 million in August 2017, bringing shareholdings to 87.9% then.
Expecting in-line earnings
Tan lifts his earnings forecast for DBS by 2%-3%, driven by higher NIM forecast with stronger HIBOR and softer loan demand implying reduced need for higher fixed-deposit offerings.
Tan is keeping his assumptions of 20 bps to 25 bps over FY2023-2025, compared to medium-term guidance of 18 bps in special provisions. Citi’s FY2023-2025 3%-7% is behind consensus, driven by softer NIM, fees and higher provisions.
Likewise, Tan lifts his earnings forecast for OCBC by 3%-5%, driven by raising NIM assumptions with stronger HIBOR and softer loan demand implying reduced need for higher fixed-deposit offerings.
He reduces FY2023 credit cost assumptions to 21 bps, compared to guidance of 15 bps to 20 bps, and keeps FY2024-2025 credit costs at 30 bps. Citi’s FY2023 forecast is 2% ahead of consensus but FY2024-2025 is 2%-4% behind consensus, driven by the 30 bps credit cost forecast.”
As at 1.49pm, shares in DBS are trading 20 cents lower, or 0.61% down, at $32.54; while shares in OCBC are trading 6 cents lower, or 0.47% down, at $12.61.
