Excerpts from Maybank report
Oversea-Chinese Banking Corporation (SGX: O39)
Good execution, but need more clarity on capital
OCBC Bank 9M24 core-earnings were ahead of MIBG/Street. NoII is making a strong recovery on a combination of solid trading income and fees.
Structurally, these are set to see further growth. Similarly, a stronger loan pipeline and NIM hedging should see NII supported. Disappointingly, Management is vague on capital returns to shareholders, whereas peers are articulating clearer and more aggressive strategies.
This could be an overhang for the stock. Raise TP to SGD17.89. While we maintain BUY, our relative preference is UOB given a clearer pathway for capital returns.
NoII moving in the right direction
OCBC Bank 3Q24 NoII has recovered to contribute 36% of total income vs. 28% a year ago. Trading was a big share, with the bank’s own trading rising 29x YoY.
Given market volatility, some of this momentum should carry through to 4Q, we think. Importantly, 3Q24 wealth management improved +25% YoY and trading customer flow increased +46% YoY showing increased client risk taking.
The current positive market momentum, should drive markto-market gains at GE. We raise 2024-26E NoII assumptions by 3-4%.
Some protection for NII downside
NIMs saw a -2bps retreat QoQ, which is lower than expected. OCBC Bank has been deploying assets to low-risk, low-yield instruments to hedge falling rates.
With the potential for higher-for-longer interest rates under a new Trump administration, there could be upside risks to NII. Concurrently, Management is seeing a pick-up in loan activities, especially in ASEAN.
Improving loan growth, could provide more offsets for margin weakness
Vague capital returns an overhang. Maintain BUY
OCBC Banks is aiming for a medium term CET1 of 14% vs. the current 17.2% from BASEL4 transitional uplift. CET1 should be 15.6% when BASEL4 is fully phased.
This implies around SGD4bn-7bn of excess capital. In contrast to DBS and UOB, who are articulating clear pathways for capital returns through more dividends and share buybacks, OCBC has been vague.
Management claims a preference for dividends over share buybacks, but without a clear indication of how much higher this could be above its 50% payout guidance.
This uncertainty could be an overhang for the stock, we think. We have generously raised 2024-26E DPS assumptions by 2-4% given strong operational performance.
Our multi-stage DDM (COE 8.4%, 3% terminal) TP is raised to SGD17.89 from SGD17.01. Maintain BUY.
Value Proposition
OCBC Banks is the second-largest Singapore bank by assets. Present in Malaysia, Indonesia and Greater China. It acquired ING’s Asia Private Bank and Barclays’s wealth units in HK and Singapore to build up wealth management.
Its 87.8%-owned subsidiary Great Eastern is a leader in Singapore life insurance and bought Wing Hang Bank (WHB) in HK in 2014 to strengthen its presence in Pearl River Delta.
You can find the full report here and the bank website here.Â
