Oversea-Chinese Banking Corporation’s (OCBC) capital management initiatives were the main focus of its Feb 26 media and analysts briefing, alongside the bank’s ongoing efforts to bring separately-listed insurer Great Eastern Holdings (GEH) completely under its “One Group” strategy and corporate structure.
OCBC’s plan to return $2.5 billion of excess capital to shareholders over two years, announced alongside its financial results for FY2024 ended Dec 31, 2024, divided analysts like it did with shareholders.
Some analysts, like Jonathan Koh from UOB Kay Hian Research, were charmed by OCBC’s “attractive” dividend yield and “comprehensive package”. Following the news, Koh raised his target price — already one of the highest on the street — even further to $21.10 from $20.80 previously, along with a “buy” call.
RHB Bank Singapore’s analysts, too, upgraded OCBC to “buy” from “neutral”, and with a significantly higher $19.10 target price from $16.80 previously.
Others, however, pointed out that OCBC’s FY2024 earnings, along with its 4QFY2024 earnings, came in below estimates. The latter, at $1.69 billion, was reason enough for Phillip Securities analyst Glenn Thum to lower his target price to $17.90 from $18.80. That said, Thum is keeping his “accumulate” call on OCBC.
DBS Group Research analyst Lim Rui Wen also pounced on this, noting that OCBC’s 4QFY2024 revenue was 3% below consensus forecasts while net profit was 5% below consensus. Lim chose to keep her “hold” call on OCBC — putting her on par with Citi Research’s “neutral” call.
See also: OCBC posts record full-year net profit of $7.59 bil for FY2024, declares 16-cent special dividend
That said, Lim raised her target price to $17.60 from $16.10 previously, only slightly above OCBC’s current share price. Citi’s Tan Yong Hong, meanwhile, has a much more tepid target of 17.20, which is below OCBC’s current trading price.
Share buyback a ‘positive surprise’
OCBC’s capital return plan includes a special dividend that increases its payout ratio to 60%, up from 50% based on the ordinary dividend, with the remainder allocated to share buybacks.
See also: DBS is RHB’s top pick with dividend yield ‘too good to ignore’
OCBC follows peer banks DBS Group Holdings and United Overseas Bank (UOB) in introducing buybacks — a move that Singaporean banks had not pursued until recently, notes Morningstar Equity Research analyst Micheal Makdad.
He projects OCBC's buybacks to total $0.5 billion annually, compared to an average of $1.0 billion annually for DBS and UOB.
“While the buybacks are a positive surprise — we hadn't expected them in OCBC’s capital return plans, unlike UOB’s — their smaller size may be inconsistent with OCBC's larger excess capital,” writes Makdad. “If the 60% dividend payout ratio is maintained beyond two years (instead of reverting to 50%), we estimate OCBC's total shareholder return will be on par with or slightly above UOB’s, though still below the 70% total payout ratio (dividends plus buybacks) that we forecast for DBS.”
Makdad has a four-star rating on OCBC based on Morningstar’s five-tier rating, and he has raised his fair value estimate for OCBC to $19 from $18 previously.
Too much of a good thing?
Still, OCBC “stands out” for having “the most excess capital” among the three banks here, which already have “very strong balance sheets” and are” generating retained earnings faster than organic growth”, he adds.
OCBC's common equity tier-1 (CET-1) ratio stands at 17.1%, or 15.3% under fully phased-in Basel III rules. “We struggle to see how the bank will reach its stated target of a 14% ratio without further increasing shareholder returns or pursuing a large acquisition,” writes Morningstar’s Makdad.
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Phillip Securities’ Thum estimates that the capital return plan, along with the share buybacks, will lower OCBC’s CET-1 to around 14.2%, which is still above their target of 14%.
“We believe that OCBC will be able to continue with the special dividend (additional 10% dividend payout ratio) for at least two more years (till FY2027) as retained earnings will continue to prop up CET-1,” adds Thum.
Bloomberg Intelligence analysts Sarah Jane Mahmud and Alison Hor think the capital return plan “suggests the bank might be more optimistic about earnings than macroeconomic fundamentals suggest”.
In fact, OCBC’s capital strength may “spark more M&A”, they add. With a bigger core CET-1, OCBC “could embark on more M&A” after increasing its stake in GEH. “Such a move could also support fee income growth at a time when net interest income gains are waning, and as two to three US Fed rate cuts leave loan yields languishing.”
The integration of Commonwealth Bank of Australia's Indonesian business — PT Bank Commonwealth Indonesia — could help OCBC keep pace with UOB and DBS as the two peer banks integrate Citigroup's retail banking units in several countries.
‘Conservative’ NIM guidance
Analysts also pressed OCBC group CEO Helen Wong on her “conservative” net interest margin (NIM) guidance for FY2025. At around 2%, this is “markedly lower” than the 2.2% recorded in FY2024, note CGS International Research analysts Andrea Choong and Lim Siew Khee.
Assumptions underpinning its guidance include the lagged effects of the 50 basis point (bp) US Federal Reserve rate cut in late-2024, explained OCBC’s CFO Goh Chin Yee. The bank’s house view is that there will be three rate cuts this year, totalling 75bps.
OCBC will continue to deploy funds into lower-yielding high-quality liquid assets to grow net interest income. “We think there could be some offsetting funding cost savings as interest rates taper off (alongside asset yields), and that OCBC’s 2% guidance could be conservative as the Fed fund futures expectation of rate cuts will commence only in 2H2025,” note the CGSI analysts.
Choong and Lim’s Feb 26 report comes in on the more optimistic side, with an “add” call on OCBC and a higher target price of $19.50 from $17.70 previously.
