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'Buy' OCBC on recovery momentum, higher-than-expected FY20 results: analysts

Jovi Ho
Jovi Ho2/26/2021 12:55 PM GMT+08  • 5 min read
'Buy' OCBC on recovery momentum, higher-than-expected FY20 results: analysts
Analysts across five research houses are recommending “buy” or “add” on the bank.
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Oversea-Chinese Banking Corporation (OCBC) is gaining momentum in its post-pandemic recovery, with analysts across six research houses recommending “buy” or “add” on the bank.

RHB Group Research upgraded OCBC to “buy” from “neutral” with a higher target price of $12.50 from $9.50.

“Sustained q-o-q improvements in operations and asset quality, underpinned by the re-opening of regional economies, have led to a more optimistic guidance on credit cost and loan growth. Our revised earnings estimates point to a healthy return on equity (ROE) recovery, while its robust capital provides room for higher dividends further ahead. These, we believe, will support a share price re-rating. Our target price reflects 1.05 times price to book value (P/BV),” notes RHB.

The team from RHB has also lifted its earnings estimates for the FY2021-FY2022 by 18% and 11% respectively due to "assumptions of lower credit costs and sustained net interest margins (NIMs)".

On Feb 24, OCBC posted a 9% y-o-y drop in core earnings to $1.13 billion for the 4QFY2020 ended December, from $1.24 billion a year ago.

See: OCBC sees 9% lower 4Q20 earnings of $1.13 bil, proposes final dividend of 15.9 cents per share

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Quarter-on-quarter (q-o-q), this was 10% higher than 3QFY2020’s earnings of $1.03 billion.

The quarter’s earnings was also the highest in four quarters from improved operating conditions.

A final dividend of 15.9 cents per share has been proposed, bringing the total dividend for the year to 31.8 cents, representing a 39% payout of FY2020’s net profit.

See also: DBS cuts Yanlord target price from $1.43 to $1.06

RHB notes that FY2020 results are 13% above its full-year forecasts, and 9% above street estimates. A key factor for the variance was lower-than-expected provisions, it adds.

Similarly, PhillipCapital analyst Tay Wee Kuang has also upgraded his call on OCBC to “buy” from “neutral” with a higher target price of $13.65 form $9.68.

Tay has also raised OCBC’s FY2021 earnings estimates by 19% for higher insurance and wealth-management income and lower allowances.

Looking ahead, Tay expects the bank to recover by the 2HFY2021, amid improved consumer confidence.

“Existing geopolitical tensions are also not expected to worsen, which should pave the way for strong business flows in the region. This would benefit loan growth and fee income,” he says.

Meanwhile, Maybank Kim Eng Research analyst Thilan Wickramasinghe is maintaining “buy” on the bank, with a target price of $12.74, up from $12.24.

Wickramasinghe believes OCBC’s balance sheet can drive upside. “The operating environment is improving with momentum set to return to loan growth, while asset quality is better than expected. We believe OCBC stands to benefit from North Asian recovery as well as North-South trade flows. Its incoming CEO’s track record in China should also be complementary. Strong capital and provisioning buffers could provide upside surprise opportunities for write-backs, special dividends and/or higher payouts going forward, we believe.”

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In addition, he estimates FY2020 loans to expand 6% y-o-y (vs. 1% y-o-y in 2020), driven by recovering demand in Greater China, Singapore and elsewhere. Similarly, fee income should continue to benefit from wealth management inflows, as assets under management (AUM) grew 3% y-o-y in 2020; along with recovery in loan fees, brokerage, IB&A and credit cards.

Concurrently, Maybank's Wickramasinghe expects adjusted credit charges to fall to 34bps in FY2021 vs. 77bps in 2020. “This may come in lower given the orderly exits of loan moratoriums seen so far (moratoriums fell to 2% of loans in January 2021 vs. 4% in December 2020).”

CGS-CIMB Research notes that OCBC is taking a “careful approach” into the year, though a 2bps growth in NIM beat the market’s expectations of a compression.

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In a Feb 24 note, CGS-CIMB analysts Andrea Choong and Lim Siew Khee are maintaining “add” on the bank with an unchanged target price of $12.52.

“4QFY2020 NIM rose 2bps q-o-q to 1.56%, beating market expectations of a compression; we expected 1.52%. As a result, full-year FY2020 NIM narrowed 16bps y-o-y to 1.61%.”

That said, OCBC expects NIM to come in at 1.5% to 1.55% in FY2021F. “The bank does not expect to experience any cliff effect from exit of moratoriums. Group loans under moratorium decreased to 2% in January 2021 (from 9% in September 2020). We see positive share price impact given the earnings beat and better-than-expected NIM performance.”

DBS Group Research analyst Lim Rui Wen notes that OCBC is undergoing a leadership change, with new management in the form of Helen Wong, who will succeed Samuel Tsien in April as Group CEO. “Updates on capital management, inorganic growth plans and broader strategic direction will be welcomed by investors.”

Lim also recommends “buy” on OCBC, with an unchanged target price of $12.50.

“We remain conservative over OCBC’s income outlook into FY2021-2022F; we believe that management is likely to continue adopting strict cost discipline to manage its bottom line,” says Lim in a Feb 25 note.

Finally, UOB Kay Hian Research analyst Jonathan Koh highlights how OCBC beat expectations with 4QFY2020 earnings crossing the $1 billion mark.

Koh is maintaining his “buy” call on the bank, with a target price of $14.68.

“OCBC beat our expectations due to a combination of resilient fee income, robust net trading income, lower credit costs and growth in contribution from associate Bank of Ningbo. With Common Equity Tier-1 capital adequacy ratio (CET-1 CAR) at 15.2%, which is substantially higher than its target range of 12.5% to 13.5%, there is room for dividends to fully normalise to pre-Covid-19 levels. OCBC provides an attractive dividend yield of 4.6% for 2021 and 5.2% for 2022.”

As at 12.35pm, shares in OCBC Bank are trading 5 cents lower, or 0.45% down, at $11.02.

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