(See also: OCBC reports 18% fall in 4Q earnings to $789 mil)
CIMB’s analyst Jessalynn Chen noted that the OCBC had set aside additional provisions for lower collateral values, shorter charter contracts, lower charter rates, and spillover effects. The oil and gas sector is also expected to remain challenging until oil prices stablise above US$60 per barrel, charterers are able to secure longer term contracts, and capital injections into the sector increase.
At the same time, the group’s net interest margins remained unchanged despite positive loan growth. Maybank Kim Eng’s Ng Li Hiang said in a note on Wednesday that it reflected the growing competition among the banks for better quality credit, as well as a growing appetite for higher market share.
“Management guided FY17 NIM to be at least 1.67% or slightly better, which also seems to indicate that the pass through effect for rising SGD rates on NIM is likely to be marginal and no widening of credit spreads,” said Ng. “This also affirms our view that competitive pressures will offset some of the benefits from the loan re-pricing interval.” Maybank Kim Eng has a “sell” recommendation for OCBC with a target price of $8.05.
See also: OCBC’s CEO change ‘earlier’ than expected; Citi stays ‘neutral’ with target price 6.8% under
In fact, CIMB’s Chen pointed out that the group’s return on equity had fallen to 8.8% in 4QFY16, the “lowest since the GFC”. While interest rates are expected to increase and improve the bank’s net interest margins, Chen expects the overhang from the oil and gas sector to “erode the benefits of higher rates” in the short to medium term. As such, CIMB has maintained its “reduce” rating on the stock with a target price of $8.83.
DBS Group Research does not think things are all that bad for OCBC, as research analyst Lim Sue Lin observes that its life assurance business’ earnings were affected by a divestment loss in FY16, and was exacerbated by the divestment gain that was recorded in FY15.
“[Great Eastern’s] underlying business remained strong with total weighted new sales up by 13% y-o-y and new business embedded values rising by 22% y-o-y,” wrote Lim in a note on Wednesday. “These are crucial in determining the future profit generation of a life insurance company.”
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At the same time, the bank’s expenses in the current quarter also included integration costs of $34 million for its Barclay’s acquisition. “Excluding these, expenses would have risen 2% y-o-y,” she said.
Furthermore, the bank’s regional businesses largely appear to be staying afloat, despite the current environment. OCBC-Wing Hang’s earnings remained unchanged despite higher provisions, as the group recorded higher revenue from non-interest income. OCBC NISP in Indonesia had a stellar performance, with an 18% growth in earnings amid higher provisions.
Given that the bank’s share price has already accounted for increase in interest rates, the brokerage has downgraded OCBC to a “hold” rating with a target price of $10.30.
As of 11.48 am, shares in OCBC are trading at $9.43 on Wednesday.
