Oversea-Chinese Banking Corporation (OCBC) may have posted record full-year net profit for FY2024 ended Dec 31, 2024, but shareholders sold the stock on Feb 26 for a number of reasons.
Firstly, OCBC’s full-year net profit of $7.59 billion for FY2024 was up 8% y-o-y. This was, however, 1.4% below consensus estimates. The bank’s 4QFY2024 earnings of $1.69 billion, while up 4% y-o-y, was some 5% below the consensus forecast in a Bloomberg survey of five analysts.
As the last of Singapore’s three banks to post full-year results, OCBC announced its own $2.5 billion capital return plan featuring special dividends and share buybacks over two years.
The capital return comprises special dividends amounting to 10% of the group’s net profit for FY2024 and FY2025, with the balance via share buybacks over two years, “subject to market conditions and regulatory approvals”.
For FY2024, the board has recommended a special dividend of 16 cents per share on top of a final ordinary dividend of 41 cents per share. If approved at OCBC’s upcoming annual general meeting, this will bring the total ordinary dividend for the year to 85 cents per share.
OCBC’s total dividend of $1.01 per share for FY2024 represents a total payout ratio of 60% for the year.
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Some have pointed out that OCBC’s final dividend of 41 cents per share is below FY2023’s final dividend of 42 cents per share.
OCBC group CEO Helen Wong acknowledged the market chatter at a media and analysts briefing on Feb 26, saying: “People say, ‘Why are you lowering your ordinary dividend?’ Hey, this is not lowering our dividend. We are paying more dividends.”
Wong also points out that the total dividend is above the 50% payout ratio target that she had set at the release of the bank’s FY2022 results. OCBC paid 53% of profits in dividends for FY2022 and FY2023.
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Other banks have introduced similar plans to pay out excess capital — DBS Group Holdings announced a so-called capital return dividend of 15 cents per share per quarter to be paid out over FY2025. In the subsequent two years, DBS expects to pay out a similar amount of capital either through this or other mechanisms, barring unforeseen circumstances.
United Overseas Bank (UOB), meanwhile, announced a $3 billion package of special dividends and share buybacks to distribute surplus capital over the next three years.
Wong notes that some shareholders have asked why OCBC’s plan spans just two years and not three like the other banks. “Isn’t it better when we actually deliver the returns faster in two years? We talked about $2.5 billion, so if you just divide it by two, we’re talking about $1.25 billion a year.”
OCBC’s management will “continue to review” its combination of special dividend and share buyback “as we go along”, adds Wong.
The two-year capital return plan is expected to reduce OCBC’s common equity tier-1 capital adequacy ratio (CET-1 CAR) by “about one percentage point (ppt)”, says Wong, and improve return on equity (ROE) by “nearly 1ppt as well”.
OCBC’s group CET-1 CAR is subject to the Monetary Authority of Singapore’s (MAS) final Basel III reforms requirements, which came into effect on July 1, 2024 and are being progressively phased in between July 1, 2024 and Jan 1, 2029.
Group CET-1 CAR as at end-2024 was 17.1% and was 15.3% on a fully phased-in basis.
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OCBC may need clearer FY2025 capital plans to support growth and boost shareholder returns, says Rena Kwok, senior credit analyst at Bloomberg Intelligence.
OCBC has at least $3 billion in excess capital but a weighted average cost of capital higher than that of its peers, adds Kwok. “With about $800 million of dollar tier-2 capital rolling off this year, it has opportunities to optimise its capital structure amid expected rate cuts.”
‘Conservative’ NIM forecast raises questions
OCBC’s house view is for three rate cuts by the US Federal Reserve this year, for a maximum of 75 basis points (bps).
In 2024, the Fed cut rates thrice and by 100bps in total, landing the Federal Funds Rate (FFR) at 4.5%.
In FY2024, OCBC’s net interest income hit a new high of $9.76 billion. According to OCBC CFO Goh Chin Yee, OCBC’s NIM sensitivity per basis point fall in rates fell to between $4 million and $5 million from $7 million a year ago.
Now, Wong forecasts group net interest margin (NIM) for FY2025 to be “in the region of 2%”. That is, however, much lower than the 2.15% recorded in 4QFY2024, 3bps lower q-o-q, and the 2.20% recorded in FY2024, 8bps lower y-o-y.
OCBC says the q-o-q decline in NIM was due to loan yields tightening at a faster pace than the drop in deposit costs, which were associated with FFR cuts in 2H2024.
OCBC’s NIMs have been on a declining trend since a high of 2.31% in 4QFY2022, as have the NIMs of the other two banks.
Some analysts think the NIM forecast is “conservative”; Goldman Sachs, for one, expects OCBC’s FY2025 NIM to be higher at 2.07%.
OCBC also thinks loan growth will slow this year. Loan growth guidance for FY2025 is mid-single-digit growth after achieving loan growth of 8% y-o-y to $319 million in FY2024, the highest among the three local banks. Loans to customers comprise $319 billion out of OCBC’s total assets of $443.4 billion.
“Besides the house view of three rate cuts, for our net interest income, we are prioritising lower-yielding high-quality liquid assets (HQLA). NIM is a by-product of our balance sheet strategy,” says Goh.
According to Goh, FY2024 NIM fell as funding costs rose faster than asset yields, alongside market rate movements. NIM also partly narrowed, caused by the increase in high-quality assets, which grew by 11.7% y-o-y.
Growth assets are related to capital, notes Wong. “We have ways to rationalise the risk-weighted assets (RWA). Under the transitional Basel III [Endgame], there is only a short-term benefit to CET-1. We take all this into account. We want to grow more revenue that is less RWA-based. That is why wealth is such a big piece that we’re focusing on.”
According to Wong, OCBC “is doing quite well” on its FY2024 wealth AUM, wealth management revenue growth and net new money. “This will ultimately lead to better capital and better programmes for us to make better returns to our shareholders.”
The importance of Great Eastern
Wong has said categorically that she will not be giving Great Eastern Holdings (GEH) shares as dividend-in-specie to OCBC’s shareholders.
In 2024, GEH contributed 11.6% to OCBC’s net profit. At one point, GEH contributed as much as 20% to OCBC’s net profit. Any giveaway to OCBC’s shareholders would put a dent in OCBC’s earnings.
During OCBC’s results briefing, Wong showed a slide on how GEH could enhance OCBC’s shareholder value. A balanced portfolio — comprising commercial banking, wealth management and insurance — can stabilise the group during periods of uncertainty and volatility.
Wong believes an integrated GEH within OCBC would help the group realise “more synergistic value”. She points out that bancassurance deals usually benefit the insurer, which has access to the bank’s customers, and not the other way around.
However, in the OCBC-GEH relationship, 70% of GEH customers own OCBC products and 30% of OCBC customers own a GEH insurance product.
“There is still room to grow, for OCBC customers to hold more GEH products. In Malaysia, there would be more opportunities for our Malaysia banking business to work closer with GEH,” Wong says.
However, in 2024, GEH’s agency sales held up and increased, but bancassurance sales fell for both Singapore and Malaysia.
Greg Hingston, CEO of GEH, blamed the interest rate cycle. “The rate environment changed over the last couple of years. For bancassurance, generally, there was a lot of premium financing that had been relevant previously and that became a lot less relevant as the rate environment changed. We had some turnover in the bancassurance team, and capacity was impacted in Malaysia and Indonesia.”
Nonetheless, Hingston says he is looking at more synergies between GEH and OCBC. “The affluent high-net-worth is probably a segment we’ve punched under our weight in,” he says.
GEH has now introduced an investment-linked legacy plan and a single-premium indexed universal life plan, which is targeted at high-net-worth individuals and wealthy families.
In Malaysia, GEH has enhanced its multi-generation wealth transfer solution. These products could be offered to customers of OCBC’s private bank, the Bank of Singapore.
“When I look at the synergies with OCBC, there’s more in how we can co-develop products, continue to improve the bancassurance model, and focus on investing more in our digital and analytics capabilities so that the tools that we’re providing to our financial advisors and customers help them make better financial planning and healthcare decisions,” Hingston says.
