SINGAPORE (Feb 25): DBS Group Research is maintaining its “buy” call on Oversea-Chinese Banking Corporation (OCBC) with a lower target price of $12.90, from $13.20 previously.
This came on the back of a 11% y-o-y increase in FY18 earnings to $4.49 billion, driven by record earnings from its banking operations which grew 22% y-o-y.
However, 4Q18 earnings dropped by 11% y-o-y to $926 million, due to a decline in earnings contribution from Great Eastern Holdings (GEH) although net profit after tax from banking operations grew 22% to $817 million.
See: OCBC reports 11% rise in FY18 earnings to $4.49 bil on banking ops
In a recent analyst briefing, OCBC has lowered its loan growth guidance from mid-to-high single digit to low-to-mid single digit, in view of macroeconomic conditions. The group also expects NIM to see uplift, though expansion would be less in FY19 than FY18, due to the scope for mortgage rate repricing upwards.
In a Monday report, analyst Lim Rui Wen says, “Though loan growth and NIM expansion are expected to moderate into FY19F, we believe that ongoing opportunities for loan repricing should still have a positive impact on NIM and outpace increase in cost of funds.”
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OCBC continues to guide for credit costs to be between 12-15 basis points (bps), which the analyst believes the higher provisions in 4Q18 relate primarily to its Coastal Oil exposure, as well as further provisions for the group’s oil and gas portfolio.
The bank is keeping a prudent stance in providing loans relating to seven accounts belonging to five groups as it relooked at previous cash flow expectations coming through from vessel charter rates in a higher oil price environment.
“We believe that this should be a one-off adjustment and do not expect further oil and gas-related provisions in the near term,” says Lim.
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“We believe that current valuations are undemanding with mid-single-digit income growth expectations in a benign credit environment. OCBC continues to provide attractive dividend yield of 4%. There is potential upside to dividends given OCBC has the highest CET1 ratio among the Singapore banks,” adds Lim.
As at 11.15am, shares in OCBC are trading 1.40% lower at $11.23 or 1.0 times FY19 book with a dividend yield of 4.9%.
