Bryan Wu Mon, Jul 04, 2022
CGS-CIMB Research analyst Andrea Choong has maintained her “add” recommendation on Oversea-Chinese Banking Corporation (OCBC) with no changes to the target price of $14.20.
Despite the macroeconomic instability driving market volatility, CGS-CIMB expects quicker net interest margin (NIM) expansion and benign credit cost to be bright spots in 2QFY2022 ended June for the bank amid a modest market-related wealth management and treasury. OCBC is expected to release its 2QFY2022 results on Aug 3.
“We expect Singapore banks’ 2QFY2022 earnings to still be weighed down by market volatility amid macroeconomic headwinds of unabating inflation, uncertainties on interest rates and recession risk,” writes the analyst.
“Nonetheless, NIM expansion and border reopenings across the region, such as the shorter quarantine period upon arrival in China, are bright spots for the sector,” she adds.
The analyst expects OCBC to post a S$1.3 billion net profit for 2QFY2022, a 2% decrease quarter-on-quarter (q-o-q) but 15% gain year-on-year (y-o-y), as benchmark rates have accelerated following the Fed Fund Rate (FFR) hike of 50 and 75 basis points (bp) in May and June respectively.
“As such, we expect a quicker pace of NIM expansion notwithstanding the three to six month lag time for the repricing of loan portfolios and stronger outflow of current account and savings account (CASA) deposits into fixed deposits,” says Choong, who expects NIM to rise by about 9bp q-o-q to 1.64% in 2QFY2022.
Not spotting particular weaknesses in any of OCBC’s portfolios, CGS-CIMB also expects the asset quality of OCBC’s loan portfolio to be contained.
The analyst says that CGS-CIMB remains watchful on elevated mortgage rates, energy prices and commodities trading. It is also cognisant of the impact on borrowers’ repayment capabilities amid the FFR hikes, hence Choong expects the results briefing for the overall banking sector in Singapore to be centered on the implication on asset quality and credit growth.
Choong also believes that loan growth for OCBC could be relatively muted in the second quarter, as she predicts a 1% q-o-q growth, amid customers remaining cautious. Hence, she anticipates loan-related non-interest income lines to be softer q-o-q as well.
“We think credit costs could remain benign at 12bp in 2QFY2022. Risks to this call is if OCBC shores up on its management overlays as a precautionary step. A significant pick-up of Asean-China trade flows as China re-opens is a key catalyst,” Choong writes, while noting that therecession continues to be a key downside risk.
As at 11.20am, shares in OCBC are trading 0.8% or 9 cents higher at $11.39. The stock is trading at a FY2022 P/E of 9.46x with a dividend yield of 5.27%.