Some analysts see a stable outlook ahead for Oversea-Chinese Banking Corporation (OCBC Bank) following its results for 3QFY2022 ended September, with mid-single digit loan growth within reach in the final quarter of the year.
RHB Group Research analysts are the most bullish among research houses here, maintaining “buy” on OCBC with a higher target price of $15 from $13.90 previously. The new target price represents a 25% upside from a share price of $12.04.
“Robust net interest margin (NIM) expansion, benign credit cost on improving asset quality and tightly controlled cost growth were key standouts in 3QFY2022,” write RHB analysts in a Nov 7 note. “Earnings upgrade for refreshed guidance for NIM and credit costs have resulted in valuation falling to attractive levels.”
Higher interest rates have lifted banks’ bottomlines. OCBC reported earnings of $1.6 billion for 3QFY2022, up 31% y-o-y; while revenue was up 23% y-o-y to $3.15 billion.
OCBC's NIM increased by 54 basis points (bps) to 2.06% for 3QFY2022. This helped lift quarterly net interest income (NII) to more than $2 billion for the first time, with a gain of 44% y-o-y to $2.10 billion.
OCBC added 2% q-o-q to its loan book, bringing year-to-date (ytd) growth to 4.6% on an annualised 6.1%, note RHB analysts.
See also: OCBC reports record quarterly earnings of $1.6 billion, up 31% y-o-y
Management expects credit demand, which gained momentum in 3QFY2022, to be sustained in 4QFY2022, they add. “We believe OCBC will end FY2022 with a 6% y-o-y growth in loans, within management’s target of a mid-single digit increase.”
OCBC is guiding to post 2.1% NIM in 4QFY2022. “NIM expanded by a robust 35 bps q-o-q to 2.06% in 3QFY2022, the second consecutive quarter of better-than-peer margin improvement. Management attributed the NIM uplift to improved margins across OCBC’s key markets as the increase in asset yields outpaced the rise in funding costs. Management expects to maintain NIM at 2.15% in 4QFY2022. This would result in an average NIM of 1.9% for FY2022F.”
RHB thinks this is a conservative target. “We see an upside risk to management guidance as we believe NIM would likely edge higher, although at a more moderate rate as funding costs trend higher.”
See also: RHB stays ‘neutral’ on telco sector amid fierce SIM-only competition
Positive momentum
Meanwhile, Maybank Securities analyst Thilan Wickramasinghe thinks both margins and funding costs are set to rise.
In a Nov 5 note, Wickramasinghe is maintaining “buy” on OCBC with a higher target price of $14.70 from $14.39 previously.
About 90% of OCBC’s loans are on floating rates, notes the Maybank analyst. “This has enabled the group to reprice rate hikes effectively. However, current account savings account (CASA) deposits have fallen to 56% from 62% a year ago and management expects funding costs to pick up pace going into 2023.”
However, Wickramasinghe believes NIM growth will start to taper in 2HFY2023. “We forecast FY2022 NIM to expand 42 bps y-o-y, followed by 9 bps y-o-y in FY2023. Concurrently, we lower our FY2023-2024F loan growth forecasts by 2-4 percentage points (ppt) due to uncertainty in macro conditions, particularly in North Asia. Nevertheless, improvements in NIM should offset this slowdown, in our view.”
In addition, asset quality is a key concern for the coming year, says Wickramasinghe.
OCBC’s non-performing loans (NPL) fell to 1.2% from 1.5% a year ago. Relief loans are now just 0.2% of its loan book. However, Greater China NPL increased three times y-o-y.
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“Management claims this is primarily from a Singapore-based customer that has invested in Mainland property, and it has been classified for company-specific reasons. The group is not seeing sectoral stress so far,” writes Wickramasinghe.
Nevertheless, as interest rates continue to rise, he expects sectoral stress risks to increase as clients see increasing debt servicing burdens. “We have raised FY2023-2024F NPL ratios by 6 bps to 27 bps as well as provisioning costs by 2%-15% as a result.”
Relatively conservative margins
On the other hand, CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee think OCBC’s conservative NIM guidance spells compression in the coming year, such as when the US Fed pauses or cuts rates.
In a Nov 5 note, Choong and Lim are maintaining “add” on OCBC with a lower target price of $13.70 from $15.50 previously.
“Going into FY2023, there will likely be continued CASA outflow into fixed deposits given the higher yields. Nonetheless, OCBC expects to be able to maintain its CASA ratio above 50% over the medium term,” write Choong and Lim. OCBC posted a CASA ratio of 56% in the latest quarter.
For FY2023, management “conservatively” guides for a 2.1% NIM. Choong and Lim believe that this implies some NIM compression to come as the potential decline in asset yields move ahead of locked-in funding costs, such as in fixed deposits. “In all, we think that OCBC’s NIM expansion may have been front-loaded in 2QFY2022 to 3QFY2022, and expect this to narrow going forward.”
As at 9.28am, shares in OCBC are trading 1 cent higher, or 0.08% up, at $12.13.
