Analysts from CGS-CIMB Research, DBS Group Research, PhillipCapital, RHB Group Research and UOB Kay Hian are recommending investors continue to add their positions in Oversea-Chinese Banking Corporation (OCBC) even after the bank’s net profit of $973 million for the 4QFY2021 stood below consensus’ estimates by 18%.
The miss was due to the heftier 44 basis points (bp) of credit costs, and above the 25 basis points CGS-CIMB analysts Andrea Choong and Lim Siew Khee expected.
According to their estimates, DBS’s 4QFY2021 net profit missed their estimates by 14%.
That said, Choong and Lim have kept their “add” call on the bank with the same target price of $14.20.
To them, OCBC is attractive at 1.1x FY2022 P/BV, below its 1.4x peak during [the] last rate hike cycle, write the analysts in their report on Feb 23.
During its results release on Feb 23, OCBC indicated that it is cautiously optimistic for the FY2022, given the improving business sentiment from an economic rebound across Asean. This is despite the headwinds of inflation, rising commodity prices and geopolitical tensions, says the bank.
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The bank has also targeted mid-to-high single-digit loan growth for FY2022 (from FY2021’s 8% growth) and a compound annual growth rate (CAGR) of over 10% over FY2021 – FY2024 in income, something which is achievable, in Choong and Lim’s view.
“[The bank’s targets will be] supported by strong wealth management income and rate hikes,” they write.
To be sure, OCBC expects wealth management income (which is currently around 37% of its total income) to remain a key driver. Besides wealth management, earnings will likely be driven by net interest margin (NIM) expansion, note the analysts.
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“OCBC guides that it has a NIM sensitivity of 4.5 bp per 25 bp US federal funds rate (FFR) hike, with its NIMs likely to trend 1.5-1.55% in FY2022. We factored in six FFR hikes over FY2022-FY2023, and think NIMs may rise a cumulative [estimated] 22bp to [around] 1.76% over FY2022-FY2024, with expansion likely to be backloaded given an estimated c.6 months for the pass-through from FFR hikes into NIMs,” they write.
Going into the FY2022, OCBC has guided for lower credit costs of 20 bp to 25 bp.
“Although OCBC has [around] $400 million of management overlays (or excess impairments) in 4QFY2021, it views its current ECL model assumptions to be insufficient in providing for potential recessionary scenarios. Accounting for this, its excess impairments would amount to less than $100 million. Management guides that a writeback of these overlays are not likely at this juncture,” write the analysts, who have kept their estimate at a conservative 25 bp for credit costs in FY2022.
To this end, CGS-CIMB’s Choong and Lim have raised their dividend estimates for the FY2022 to 60 cents, or a 50% payout, as they expect an earnings per share (EPS) growth of 11% as well as surplus capital.
OCBC’s total dividend for the FY2021 of 53 cents stood higher than the 50 cents pegged by the CGS-CIMB analysts in FY2021.
The higher-than-expected quantum of Fed hikes will pose upside risks to OCBC’s share price, while downside risks [are the] reintroduction of Covid-19-related social distancing measures and, consequently, moratorium schemes, say the analysts.
OCBC “well-positioned” for higher dividends
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DBS analysts Paul Yong, Lim Rui Wen, as well as the Singapore research team believe that there is further room for OCBC’s share price to grow further on the back of economic recovery and a higher interest rate environment, which should “bode well for OCBC’s NIM”.
In their Feb 24 report, Yong and Lim have kept “buy” on the bank with a higher target price of $15 from $14 previously on higher return on equity (ROE) estimates. OCBC’s 4QFY2021 net profit missed DBS’s estimates by 19%.
“This is equivalent to [an estimated] 1.23x FY2022 P/BV that is [around] 0.5 standard deviation above its 12-year forward P/BV multiple,” write the analysts.
As at end-December, OCBC reported a common equity tier 1 (CET-1) ratio of 15.5%, which is above the optimal operating level and the highest amongst its peers. In the absence of mergers and acquisitions (M&As), Yong and Lim view the possibility of OCBC distributing higher dividends to be on the horizons.
The higher dividends may also be a potential catalyst to the bank’s share price, they write.
“Management has shared that they will not be limited by their target dividend payout ratio range of 40% - 50% and that their optimal CET-1 ratio is 12.5-13.5% in the longer term,” note the analysts.
In the FY2022, Yong and Lim have upped their estimates by 3% - 4% mainly on higher NIM expectations and higher non-interest income.
Following management’s briefing for the analysts, DBS’s Yong and Lim note that any opportunities the bank undertakes will “have to supplement the current business by either adding to the scope or scale of OCBC’s operations”.
“Hence, [this is] unlikely to be ventures outside of its core business or in new geographies,” they write.
OCBC is PhillipCapital’s “preferred pick” on attractive valuations
PhillipCapital analyst Glenn Thum has kept his “buy” call on PhillipCapital with an unchanged target price of $14.22.
“We continue to assume 1.24x FY2022 P/BV and ROE estimates of 9.3% in our Gordon growth model (GGM) valuation,” writes Thum in his report on Feb 28.
He adds that the bank is PhillipCapital’s “preferred pick” amongst the three Singapore banks due to its attractive valuation.
The upside in dividend from the bank’s 15.5% CET-1 ratio buffer, as well as the lower provisioning on the recovery of the Malaysian and Indonesian economies is also another plus, in Thum’s view.
According to his estimates, OCBC’s FY2021 earnings of $4.86 billion met his estimates despite the higher-than-expected allowances.
“Assuming rate hikes totalling 100 bps this year, based on our calculations, our FY2022 net interest income (NII) can climb $725 million (or 11%) resulting in an increase in our FY2022 PATMI by 10%,” writes Thum.
Favourable risk return
The Singapore research team at RHB have kept “buy” on OCBC with a lower target price of $14.40 from $14.80 previously as OCBC’s earnings for the FY2021 missed its estimates slightly at 96% of its full-year estimates.
The lower target price is based on a lower GGM-derived intrinsic value to $13.86.
Key positives from the bank’s results include the strong fee income growth, a healthy pick-up in loan growth from the 2HFY2021, high current account savings account (CASA) ratio of 63.3% and solid CET-1 ratio of 15.5%, notes the team. Meanwhile, key negatives include the sharp q-o-q increases in non-performing loans (NPLs) in Malaysia, Indonesia and China in the 4QFY2021.
“OCBC’s FY2021 earnings and dividend payout have returned to pre-Covid-19 levels. Still, the jump in allowance expense and regional NPLs in 4QFY2021, although a reflection of conservative management of asset quality, are noticeable dampeners that would likely see continued share price underperformance against peers in the near term,” writes the team in its Feb 24 report.
“That said, with net profit projected to grow 16% per annum (p.a.) in FY2022-FY2023 and current valuation at 1.0x FY22F P/BV, the risk return appears favourable.”
As management guides for NIM of 1.50% - 1.55% in FY2022, acknowledging upside risk to margins on interest rate hikes, the RHB team has factored in higher NIMs “as we pencilled in one rate hike per quarter for 2022 (consistent with our assumption for peer banks)”.
The team’s net profit estimate for OCBC has remained unchanged for FY2022. They have, however, raised their net profit estimate for the FY2023 by 8%.
OCBC to benefit from NIM expansion in 2HFY2022; provides an attractive dividend yield of 4.3% for FY2022
UOB Kay Hian analyst Jonathan Koh has kept “buy” on OCBC with a lower target price of $15.82, from $16.12 previously. The new target price is based on a GGM-derived 1.24x FY2022 P/B, with an ROE of 9.9%, cost of equity (COE) of 8.0% and growth of 0.2% (from 0.5% previously).
To Koh, OCBC’s results for the 4QFY2021 was a “disappointing quarter” due to a shortfall in fee income, higher operating expenses and higher provisions.
However, on the back of rising interest rates, Koh, like the rest of the analysts, expects OCBC to benefit from a NIM expansion in 2HFY2022.
To him, OCBC’s FY2022 P/B is low at 1.1x. At its current share price, OCBC provides an “attractive” dividend yield of 4.3% for 2022 and 4.6% for 2023.
“We expect four hikes in 2022 (previous: three hikes), four hikes in 2023 (previous: three hikes) and no hike in 2024 (previous: two hikes),” writes Koh. He has trimmed his net profit forecast for FY2022 by 2% as “positive impact of an earlier NIM expansion is offset by a combination of lower fee income, higher operating expenses and higher provisions”.
As at 1.20pm, shares in OCBC are trading 6 cents higher or 0.51% up at $11.73, or an FY2022 P/B of 1.0x and a dividend yield of 5%, according to DBS’s estimates.
Photo: bloomberg
