On this, Lim has upgraded her recommendation on OCBC to “buy” from “hold” with a higher target price of $11 from $9.50 previously.
Since OCBC’s share price has gained more than 10% from early November when it was trading near trough valuations, Lim believes that there is further room for OCBC’s share price to grow amid expectations of a gradual pick-up in long-end yields, as the bank is seen as a proxy to economic recovery.
Lim also sees several upsides to the bank including its strong non-performing asset (NPA) coverage of 109% (which is higher than the 101% in 2QFY2020) and ongoing provisioning of $1.8 billion.
She has also noted that the bank’s strength in non-interest income franchise, along with an improved outlook for Great Eastern Holdings, should continue to provide some income support for FY2021F despite the potential net interest margin (NIM) headwinds going into the 4QFY2020.
To this end, Lim has also upped her net profit estimates to $3.27 billion for FY2020F and $4.00 billion for FY2021F on better contributions from non-interest income.
Further upsides to the stock include the fact that some negatives have already been priced in.
“We believe the market has priced in lower net interest income impact into FY21F. As we expect some asset quality deterioration into 2H20 and 1H21, especially when the various moratoriums and reliefs expire, we believe the upside is capped at around 1x price-to-book (P/BV),” she says.
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While she sees the bank’s sustained business momentum and the macroeconomic recovery as catalysts to OCBC’s share price, Lim says she remains “conservative” over its income outlook into FY2021F-2022F, as management is “likely to continue adopting strict cost discipline to manage its bottom line”.
As at 12.04pm, shares in OCBC are trading 11 cents higher or 1.1% up at $10.22; 0.9 times FY2020 P/B with a dividend yield of 3.4%.
