SINGAPORE (Nov 2): UOB KayHian and CGS-CIMB Securities are maintaining Oversea-Chinese Banking Corp (OCBC) at “buy” on 5bp q-o-q NIM expansion.

OCBC reported net profit of $1.2 million for 3Q18, 13.3% above UOB’s forecast of $1,099 million, 13% above CGS-CIMB’s forecast and 8% above consensus forecasts.

See: OCBC reports 12% rise in 3Q18 earnings to record $1.25 bil

See also: DBS restarted at 'buy' by KGI on rising interest rates, private banking growth

The beat was largely due to 81% higher y-o-y trading income given increased customer flows and 150% y-o-y higher dividend income. Despite lower q-o-q loan growth, the rise in NIMs resulted NII rising 3.8% q-o-q/8.9% y-o-y.

NIM expanded 5bp q-o-q to 1.72%. OCBC raised interest rates for residential mortgages in Singapore since August with full impact expected in 4Q18.

It also trimmed surplus US$ fixed deposits (US$ loan-to-deposit ratio has improved from 65.6% in 1Q18 to 76% currently).

In a Thursday report, CGS-CIMB analyst Lim Siew Khee has raised her NIM expectations to 1.7% in FY18 from 1.67% previously with full impact of the mortgage repricing to be realised in 4Q18.

In a separate report, UOB analyst Jonathan Koh notes that loans expanded 1.7% q-o-q and 10.4% y-o-y in 3Q18. The sequential expansion was driven by loans in Singapore and Greater China which grew 1.4% and 1.1% q-o-q respectively.

In addition, asset quality remained benign. NPL balance increased 1.8% q-o-q while NPL ratio was stable at 1.38%. Total provisions were low at $49 million due to write-back in general provisions of $45 million.

Finally, there is the potential for higher dividend payout. With CET-1 CAR improving 0.4ppt q-o-q to 13.7%, at the higher end of the target range of 12.5-13.5%. Management indicated that OCBC is likely to turn off its scrip dividend scheme for the final dividend. OCBC’s dividend policy is to maintain payout ratio at 40-50%.

“We see possibility of OCBC moving payout ratio towards mid-40%. This could bring 2019F DPS to 48 cents, which provide an attractive dividend yield of 4.5%,” says Koh.

Year to date, OCBC shares are down 9.2% to $11.34 or 10.4 times FY19F earnings.