Broker’s Call: OCBC Results Benefit From Margin Expansion and Asia Growth, Maintain Add

November 10, 2022

OCBC bank shares

CGS-CIMB Analyst take

For Singapore investors, big banks equal big dividends. Yet while Singapore’s bank stocks do give us a relatively attractive dividend yield, they’re also growing their earnings right now.

That’s unusual for most companies in this environment but banks naturally benefit when interest rates have been rising as fast as they have.

In the past two weeks, all three of Singapore’s big banks reported earnings. This time, we’re covering Singapore’s second-largest bank (by market cap), Oversea-Chinese Banking Corporation Ltd (SGX: O39) – better known as OCBC.

OCBC reported its Q3 2022 and 9M 2022 earnings last Friday (4 November). The research team at CGS-CIMB Securities maintains our “ADD” call on OCBC shares but we’ve cut our target price to S$13.70 (from S$15.50 previously).

Here’s what Singapore bank and dividend investors need to know about OCBC’s latest results.

OCBC expects continued Asia growth but remains watchful

It’s clear that the global macroeconomic picture is uncertain but OCBC remains positive on growth in Asia.

That positive outlook is underpinned by robust Singapore employment rates staying that way, as the reopening of regional economies like Malaysia and Indonesia continues.

However, OCBC does remain watchful on near-term vulnerability as higher Federal Reserve (Fed) rate hikes increases the likelihood of a recession.

OCBC Q3 2022 margins surprise on the upside

OCBC saw its net interest margin (NIM) expand faster than expected – up 35 basis points (bps) to 2.06% during the quarter.

We understand that was partly due to OCBC’s successful repositioning (over the past few years) in terms of its focus on investing in digitalisation.

This helped cash management initiatives aimed at SMEs, corporates and SOEs that helped build up the bank’s Current Account Savings Account (CASA) franchise.

Meanwhile, 90% of OCBC’s loan book is floating rate. Given that, OCBC guides for FY2022 NIMs will be close to the upper-end of c.1.8-1.9%. That implies a Q4 FY2022 of c.2.2-2.3%, which is above guidance of 2.1%.

But conservative guidance from OCBC on NIM guidance for FY2023

Going into the new year, there’ll likely be continued CASA outflow into fixed deposits (FDs) given the higher yields available.

Nevertheless, OCBC expects to be able to maintain its CASA ratio above 50% over the medium term (versus 56% in Q3 2022).

As a result, OCBC’s management is conservatively guiding for a NIM of around 2.1%. We believe this implies some NIM compression in the quarters ahead (if the Fed pauses/cuts rates) as the potential decline in asset yields move ahead of locked-in funding costs.

Reiterate Add on OCBC stock but with lower target price

OCBC management is comfortable with the credit quality of its portfolio. Stress tests (for Greater China risks, property etc.) didn’t indicate any systemic risks.

Our Gordon growth model (GGM) applied to OCBC derives a lower target price of S$13.70 as we roll over to FY2023 and factor in a higher c.4% risk-free rate. One of the key downside risks for OCBC is asset quality deterioration as interest rates rise.

Disclaimer: CGS-CIMB Securities Banks Analyst Andrea Choong doesn’t own shares of any companies mentioned.

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