The Singapore research team at RHB Bank Singapore has kept their “neutral”’ call on OCBC Bank (OCBC SP), raising their target price by 80 cents to $13.90. This is following shifting market expectations causing higher-for-longer interest rates and near-term concerns focused on asset quality from income pressures.
Prior to OCBC Bank’s release of its 1QFY2024 results ended March 31 on May 10, the analysts anticipate the banking group’s profit after tax and minority interest (patmi) in the first quarter to be seasonally higher q-o-q.
Additionally, the analysts forecast a lower y-o-y figure, partyly attributed to a low cost of credit (CoC) of 12 basis points in 1QFY2023.
They note that OCBC’s net interest income (NII) could be muted due to slower loan growth. This quarter’s loan growth trend is expected to be similar to recent quarters, which have been significantly muted with pockets of growth from corporate non-trade and mortgage segments offset by soft trade loans, the analysts add.
Overall, the analysts anticipate the loan growth from 1QFY2024 to be within the lower single digit growth guidance.
In addition, RHB forecasts the average net interest margin (NIM) for the 1QFY2024 to be lower for both q-o-q and y-o-y, versus 2.29% and 2.30% recorded in 4QFY2023 and 1QFY2023 respectively.
While the initial guide for OCBC’s 2024 NIM of 2.2%-2.25% was based on the forecasted four rate cuts, there has been a delay and scaling down on market expectations of the timing and number of rate cuts this year.
The analysts believe that the disparity between OCBC’s assumption and market expectation should not greatly impact NIM as additional assumed rate cuts would occur towards the end of 2024.
RHB also believes that a rebound in insurance income coupled with generally better wealth management activities q-o-q could signal better non-interest income (non-II) q-o-q. For y-o-y, the analysts expects non-II growth to be flattish, on the back of elevated levels of trading income in the first half of 2023 particularly in non-customer trading flows.
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The analysts expect operating income in 1QFY2024 to be flat y-o-y, offset by asset growth from the lowered NIM and flattish non-II.For q-o-q, the analysts see single-digit growth on better non-II.
Additionally, RHB notes that OCBC’s asset quality contains “no red flags”. They expect a bottomline trend for the first quarter of 2024 dependent on operating expenses (opex) control and CoC. With a 6% y-o-y opex growth they anticipate for FY2024, coupled with a higher CoC for the first quarter, the analysts expect patmi to weaken y-o-y.
However, as asset quality remains stable due to its high loan loss coverage level of 151%, the research group would “not be surprised” if OCBC’s CoC stands at the lower end of the guided range. They expect stable opex and decreasing CoC q-o-q to facilitate patmi growth.
Overall, the research group raises their target price to $13.90 due to a lowered equity risk premium assumption and a newly ascribed 2% environment, social and governance premium where OCBC scored a 3.2 following its release of OCBC’s sustainability report 2023.
As at 2.45pm, shares in OCBC Bank are trading at 20 cents higher or 1.47% up at $13.77.
