SINGAPORE (Nov 6): Analysts are maintaining their cautious stances on Oversea-Chinese Banking Corp (OCBC), despite the bank reporting a set of 3Q results that were in line with consensus estimates.

OCBC saw its earnings fall 6% y-o-y to $1.17 billion for the 3Q19 ended September, on the back of a one-time charge of $91 million due to a refinement in the group’s expected credit loss (ECL) modelling approach for its Indonesian banking subsidiary, Bank OCBC NISP.

Excluding this, the group’s core net profit was $1.26 billion, 1% y-oy higher than a year ago.

See: OCBC posts 6% drop in 3Q earnings to $1.17 bil as swelling provisions offset higher lending, wealth management income

Following the results announcement, analysts from CGS-CIMB Research, DBS Group Research and Maybank Kim Eng Research are keeping their “hold” calls on OCBC, while RHB Group Research is maintaining its “neutral” rating.

In the near-term, the analysts say OCBC is expected to see its earnings crimped by lower net interest margin (NIM), weaker loan growth, rising credit charges, an overhang of potential mergers and acquisitions (M&A), as well as uncertainties in Hong Kong.

CGS-CIMB is cutting its earnings per share (EPS) forecast by 4-5% for FY19-21F, on expectations of lower NIMs and weaker loan growth, and lowering its target price by 4.7% to $11.94.

The brokerage is lowering its NIM estimates by 1-5 basis points to 1.77% in FY19F, 1.73% in FY20F and 1.72% in FY21F, as well as moderating its loan growth forecasts to 3% in FY19-20F, from estimates of a 4% growth previously.

In a report on Nov 5, lead analyst Andrea Choong notes that OCBC expects one more interest rate cut by the US Federal Reserve in the next 12 months. The bank has already seen its NIMs slide 2 basis points q-o-q in 3Q19 due to policy rate cuts from regional central banks and pressure on loan yields, she adds.

“While funding cost savings should begin to come through from 4Q19 onwards, particularly given management’s subdued loan growth outlook of low single-digits in FY20, management guides for a potential slide in SIBOR to result in NIM compression at the lower end of the 5-10bp range,” Choong says.

Meanwhile, DBS analyst Lim Rui Wen notes that OCBC currently trades at close to 1.1 times FY20F price-to-book value (P/BV), nearly 1 standard deviation below its average 10-year forward P/BV multiple.

However, the analyst warns that OCBC could continue to see a drag on its near-term share price performance.

“We remain cautious over OCBC’s nonperforming assets (NPA) coverage, which at 78% remains the lowest among its peers, even after additional provisions written in 2Q-3Q19,” Lim says. “We see limited catalysts for the stock in the near term.”

DBS is maintaining its target price of $11.50.

RHB is also keeping its target price of $11.50 unchanged, on the back of expectations that OCBC’s wealth management gains will offset the NIM squeeze moving forward.

“We believe wealth management offers growth potential ahead,” says analyst Leng Seng Choon in a report on Nov 5. “3Q19’s wealth management fees of $265 million were up 11% y-o-y, although the q-o-q increase was a mild 1%.”

However, Leng cautions that market expectations of possible M&A could keep OCBC’s share price subdued.

On the other hand, Maybank is raising its target price by 1.9% to $11.26.

“We have raised our 2019E earnings by 2% due to a lower effective tax resulting from write-backs from its insurance business,” says analyst Thilan Wickramasinghe in a Nov 6 report.

“But with weaker guided loan growth, rising credit charges and an overhang of potential M&A, we see low upside to our revised target price,” he adds.

As at 1.17pm, shares in OCBC are trading 2 cents lower at $11.06. According to Maybank valuations, this implies an estimated core price-to-earnings (PE) ratio of 9.9 times and a net dividend yield of 4.6% for FY19E.