SINGAPORE (Nov 2): DBS Group Holdings is upgrading Oversea-Chinese Banking Corp (OCBC) to “buy”, saying it will continue to benefit from the rising rate cycle.

With NIM expansion now visible and CET1 ratio at 13.6% above OCBC’s comfortable range, DBS says this may remove overhang on the stock price due to its lower dividend yield compared to peers should the lender decide to pay higher dividends.

To recap, OCBC’s 3Q18 earnings of $1.25 billion was higher by 9% q-o-q and 16% y-o-y, ahead of consensus expectations by 8% and in line with DBS.

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

Net interest income grew 4% q-o-q and 9% y-o-y due to increasing NIM and strong loan growth. Non-interest income was relatively flat q-o-q and y-o-y, led by strong net trading income against weaker wealth management and insurance income.

“After four consecutive quarters of flattish NIM, OCBC delivered a strong 5-bp improvement q-o-q and 6-bp improvement y-o-y to 1.72%,” says analyst Lim Rui Wen.

According to OCBC’s management, of the 5-bp improvement in NIM, 1-1.5bps can be attributed to the release of excess USD amassed, while the remaining is largely due to repricing of loans.

As repricing had started in 3Q18, the full impact will be seen in 4Q18 and we expect a slight uptick in NIM going forward, adds Lim.

OCBC continues to see loan growth at a mid-to-high single digit into FY19 and for credit costs to normalise over time to 12-15bps. OCBC expects NIM to remain steady with a slight bias on the positive side.

In its update, OCBC says it has restarted discussions with potential buyers after the disposal deal with First Origin International lapsed. The latter has forfeited the deposit of $124 million to the seller OCBC Wing Hang (WHB), which we expect to be recognised in 4Q18.

Meanwhile. Great Eastern Holdings is still in discussions with authorities on the alternatives should it divest 30% of its stake in Great Eastern Malaysia. Should the divestment occur, there may be potential for a one-off dividend payment from the sale proceeds.

Year to date, OCBC shares are down 8.6% to $11.41 or 9.7 times FY19F earnings.