1Q21 net profit better than expected
- 1Q22 net profit of S$1.4bn 10% lower y-o-y but ahead of consensus by 13%
- Credit costs eased to 6bps but guidance for FY22F remains at 20-25bps
- Small exposure to China real estate sector
- Maintain BUY with TP of S$15
Investment Thesis
Poised for growth. We believe there is further room for OCBC’s share price to re-rate, as we continue to expect economic recovery and look forward to a higher interest rate environment, which should bode well for OCBC’s NIM. Coupled with a new three-year corporate strategy focused on driving growth and building on their strengths, they expect to grow income and profits by a >10% CAGR as well as loans by >10%.
Strong capital position – higher dividends on the horizon? Higher dividends may also be a potential share price catalyst, given that in the absence of M&A activities, the CET1 ratio of 15.2% is above the optimal operating level. Management has shared that they will not be limited by their target dividend payout ratio range of 40%-50% and that their optimal CET1 ratio is 12.5%-13.5% in the longer term.
Valuation:
Maintain BUY, TP S$15. Our TP of S$15 is based on the Gordon Growth Model (10.5% ROE, 3% growth, 9% cost of equity). This is equivalent to a c.1.23x FY22F P/BV that is c.0.5 SD above its 12-year forward P/BV multiple.
Where we differ:
We have lowered our estimates by 1%-4% largely on the back of potential headwinds and volatility ahead.
Key Risks to Our View:
Deteriorating asset quality. Larger-than-expected NPLs as well as a worse-than-expected COVID-19 pandemic situation globally could unwind expectations of credit cost and NPL declines and pose risks to earnings.