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Investors 'disappointed'? OCBC's 'sector-leading' CET-1 reserves overshadow 'solid' FY2023 results: analysts

Jovi Ho
Jovi Ho • 7 min read
Investors 'disappointed'? OCBC's 'sector-leading' CET-1 reserves overshadow 'solid' FY2023 results: analysts
The dividend payout ratio of 53% caps off record earnings of $7.02 billion for FY2023, up 27% y-o-y. Photo: OCBC
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RHB Bank Singapore analysts have trimmed their target price on Oversea-Chinese Banking Corporation (OCBC) following the release of the bank’s results for FY2023 ended Dec 31, 2023. This is despite results largely coming in line with expectations.

Instead, RHB analysts say investors may be “disappointed” regarding the absence of a special dividend. 

At least two other houses — Citi Research and UOB Kay Hian Research — said the same of OCBC’s decision to stick with its 50% dividend payout ratio. OCBC declared a final dividend of 42 cents per share for 2HFY2023, taking dividends for FY2023 to 82 cents, up 20% y-o-y, and translating into a yield of 6.3%.

The aggregate dividend payout of $3.7 billion — a payout ratio of 53% — caps off record earnings of $7.02 billion for FY2023, up 27% y-o-y. This is the first time OCBC’s full-year net profit has surpassed the $7 billion mark.

In a Feb 28 note, RHB analysts stay “neutral” on OCBC with a lower target price of $13.10, down from $13.40 previously. 

“Relative to OCBC Bank’s FY2023 guidance, its reported return on equity (ROE) of 13.7% missed the target to exceed 14%. For FY2024, mild net interest margin (NIM) compression and higher credit cost were guided, leading to an ROE target of 13%-14%,” say RHB analysts. 

See also: OCBC sticks to 50% dividend payout ratio for FY2023, sets NIM target above that of peers

In addition, they think the stock has done relatively well year-to-date. OCBC’s March 1 close price of $12.99 is up 0.54% ytd and up 3.92% over the year. “Yet, despite healthy capital and asset quality, investors may be disappointed that it is not ‘doing more’ with respect to capital returns. As such, we switch our preferred sector pick over to DBS from OCBC,” says RHB.

RHB has a “buy” call on DBS with a target price of $36.10, compared to its March 1 close price of $33.55. 

DBS, which announced its FY2023 results on Feb 7, raised its final dividend to 54 cents in 4QFY2023, up 6 cents q-o-q. Its full-year dividend is $1.92. Going forward, the quarterly dividend is likely to be raised to 54 cents translating into a full-year dividend of $2.16 a year. 

See also: Elite UK REIT ‘future-proofing’ with expanded mandate: CGSI

DBS also proposed a 1-for-10 bonus issue. The bonus shares will qualify for dividends starting in 1QFY2024.

OCBC targets credit costs to come in between 20 to 25 basis points (bps) this year. RHB has lowered OCBC’s FY2024-2025 patmi forecast by 2%-4%, “mainly after bringing our loan credit cost assumptions in line with guidance”. “This is cushioned by an upward revision to net interest income (NII) post the better-than-expected full-year NIM. The change to our target price is minor.”

Capital management questions

Meanwhile, Citi Research analyst Tan Yong Hong thinks questions about OCBC’s capital management — especially with sector-leading common equity tier-1 (CET-1) ratio of 15.1% post-FY2023 dividend — overshadowed the bank’s “solid operational trends”. 

In a Feb 28 note, Tan maintains his “neutral” stance on OCBC with a target price of $12.80. 

OCBC’s “robust” CET-1 was helped by the bank’s plan to optimise risk-weighted assets (RWA) over FY2023, at about $5 billion-$6 billion, says Tan. 

“With further clarity on Basel IV framework and impact, we view there could be increasing expectations for further capital return into year-end especially if there is still no clear M&A target and CET-1 potentially reaching 16.1% (or 18.1% with transitory arrangement from Basel IV.”

For more stories about where money flows, click here for Capital Section

That said, OCBC’s management is wary of integration and execution risks, which clarifies their M&A appetite for portfolio acquisition.

In addition, there was little disclosure on its $3 billion incremental revenue growth from 2023-2025, besides that it achieved $500 million of this in FY2023, as planned. Tan points out that management had earlier guided some 1% ROE guidance after fully realising these revenue lifts.

UOB Kay Hian’s Jonathan Koh, meanwhile, says some investors are “dismayed” that OCBC did not declare a special dividend.

OCBC also has a “short to medium term” target of lowering CET-1 to 14%, but management declined to elaborate further when asked by The Edge Singapore. “[OCBC] has not set a pre-determined time frame for the goal to be achieved,” notes Koh. 

DBS ups TP

On the other hand, DBS Group Research analysts Lim Rui Wen and Ng Jia Hui have raised their target price on OCBC to $14 from $13.01 previously, while staying “hold” on the bank’s stock. 

In a Feb 29 note, Lim and Ng say they assume higher ROE for OCBC going forward. “We believe this is a fair valuation, as we see limited catalysts ahead for OCBC’s share price with rising asset quality risks. We believe the downside to OCBC’s share price will be supported by its strong non-performing loan (NPL) coverage ratio of 151%.”

OCBC’s December 2023 exit NIM is 2.26%, slightly below 4QFY2023 NIM of 2.29%. “Management will be actively managing deposit costs ahead and needs to do more work to manage funding costs,” say Lim and Ng.

OCBC’s NIM guidance assumes four rate cuts beginning 2HFY2024. Every 1bps change in the interest rate over OCBC’s four major currencies will impact net interest income by $6 million-$7 million on an annualised basis. 

US, Hong Kong commercial real estate

On loans, OCBC sees pockets of opportunities in energy, power, utilities, technology, digital infrastructure and student accommodation. In addition, OCBC believes that China shows signs of bottoming out, and OCBC continues to see China customers interested in bringing investments into Asean.

OCBC has stopped financing US commercial real estate (CRE) for more than a year. Management says current borrowers in the US CRE market are strong sponsors, and they will either top-up or restructure their loans. 

Hong Kong CRE loan-to-value (LTV) is at 40% for secured loans, say Lim and Ng. While Hong Kong has a fair bit of unsecured loans, this mostly relates to large HK conglomerates with huge resources. 

OCBC predicts Hong Kong market valuations will come down with a rising vacancy rate for Hong Kong CRE but remains comfortable with the overall market at this point in time. OCBC believes that there are still keen buyers for Hong Kong prime properties but no sellers in the meantime, as sellers have holding power, with strong sponsors coming in to top-up and pay for loans. An impending rate cut will put a floor to how far transaction valuations can come down. 

For Hong Kong small- and medium-sized enterprises (SMEs), OCBC looks at both LTVs and guarantees from sponsors, and believes that there are sufficient reserves, even if valuations were to come down with LTV at 45%. 

Non-interest income driving growth

Finally, PhillipCapital Research analyst Glenn Thum points to OCBC’s fee income, which should grow. 

OCBC’s fee income rose 15% y-o-y to $460 million in FY2023. This was due to the broad-based growth in wealth management fees from increased customer activities, higher credit card fees, and loan and trade-related fees. 

Furthermore, FY2023 wealth management income grew 26% y-o-y to $4.3 billion and contributed 32% to the group’s total income.

OCBC’s wealth management assets under management (AUM) was 2% higher y-o-y at $263 billion, driven by continued net new money inflows.

With the reopening of China, OCBC is positive on the broader outlook and expects the reopening to support China-Southeast Asia trade and investment flows. OCBC has recently launched a private banking unit in Malaysia and mainland China to strengthen its wealth management services while also hiring for the business. 

Furthermore, OCBC’s recent acquisitions of PT Bank Commonwealth in Indonesia will accelerate their growth in Asean, says Thum. “Therefore, we are expecting fee income growth of 12% for FY2024.”

Hence, Thum is staying “buy” on OCBC with an unchanged target price of $14.96, which represents a 15% upside against the stock’s March 1 close price of $12.99.

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