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Rough year ahead for this banking stock

Gwyneth Yeo
Gwyneth Yeo • 2 min read
Rough year ahead for this banking stock
SINGAPORE (Jan 12): Oversea-Chinese Banking Corporation could have a rough year ahead of it, and Maybank Kim Eng is maintaining its “sell” rating on the local bank.
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SINGAPORE (Jan 12): Oversea-Chinese Banking Corporation could have a rough year ahead of it, and Maybank Kim Eng is maintaining its “sell” rating on the local bank.

Maybank’s analyst Ng Li Hiang noted that credit spreads have not widened and OCBC would be less likely to benefit from the higher risks in the lending environment. By Maybank’s estimates, a 0.2 percentage point increase in credit spreads should be able to raise OCBC’s net interest margins by 0.022%.

As it stands, the banks’ unwillingness to undertake higher risks coupled with weak loan demand has already caused its loan growth to stagnate, after excluding the fluctuations in currency. In contrast, DBS Bank’s loan growth rose 5% and United Overseas Bank’s loan growth rose 7.3% over the same period in constant currency terms.

On top of that, OCBC’s earnings are overly reliant on the volatile non-interest income, 14% of which comes from Great Eastern Holding’s life assurance earnings.

“If GEH’s portfolio is hit by unrealized mark-to-market losses from weaker capital markets, this can result in lower profits for OCBC,” cautions Ng. “Earnings momentum may not sustain in weaker economic conditions.”

What’s more, the bank’s current provision coverage of 101% may prove to be insufficient in light of growing non-performing loans.

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To that end, Maybank Kim Eng has a target price of $7.40 for the bank.

Shares in OCBC closed 5 cents lower at $9.30 on Wednesday.

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