Felicia Tan
RHB Group Research’s Singapore research team is keeping its “buy” recommendation on Oversea-Chinese Banking Corporation (OCBC Bank) with an unchanged target price of $13.90.
To the team, the bank is expected to see a “meaningful uplift” in its net interest margin (NIM) in 2022 on the back of a faster-than-anticipated rise in the US Federal Funds Rate (FFR).
“NIM, having ticked up three basis points (bps) q-o-q in 1QFY2022, should see progressive expansion in the quarters ahead as Singapore banks have started to raise lending rates following the FFR hikes in March (+25 bps) and June (+75 bps),” says the team in its July 12 report.
“This is most evident in the rise in mortgage rates – OCBC’s two-year fixed-rate mortgage has risen to 2.65% from 1.3% in December 2021. With the dot plot pointing to a projection of 3.4% (+215 bps) by end-2022 and 3.8% (+40 bps) by 2023, loan yields should continue to improve through to 2023,” it adds.
“This suggests upside to management’s NIM guidance of 1.55-1.58% for FY2022 (1QFY2022: 1.55%). A 25 bps rate hike over a 12-month period would boost OCBC’s NIM by 4-4.5bps and net profit by 3%,” continues the team.
On the other hand, the rising interest rates may have a negative effect on the demand for credit.
Furthermore, fallout from the Russia-Ukraine war, China’s Covid-19 measures, and tighter global financial conditions are also fanning fears of a global recession, which are weighing on sentiment.
This means OCBC’s customers may put off huge projects and investments for the time being.
On the back of the property cooling measures introduced by the Singapore government in December 2021, new mortgage sales have also been impacted, the team writes.
As such, it believes that loans growth for the 1HFY2022 “would continue to trail behind FY22 target of mid-to-high single-digit growth (1QFY2022: +5.6% annualised)”.
OCBC’s non-interest income, which fell 23% y-o-y in the 1QFY2022 is likely to remain flattish at $1.0 billion to $1.1 billion in the 2QFY2022.
“Fees from wealth management is expected to see little change from 1QFY2022’s $256 million as volatility in the financial markets keeps clients sidelined. Fees from loans, trade and remittances would be subdued on softer loan demand and trade flows,” the team says.
“That said, its $251 billion assets under management (AUM) would provide steady income from fund management, credit cards fees should recover on higher consumption spending and travel, while its insurance business remains resilient,” it adds.
Further to its report, the team is positive that OCBC’s rise in funding costs will be “manageable” as the banking system is “flushed with liquidity” with “little concerns over deposit competition”.
“There has been some shift to fixed deposits and the Singapore Savings Bonds (SSBs) with the interest rate uptrend,” the team says. “More importantly, the bank has sizeable CASA deposits of [around] 60% of customer deposits.”
In addition, the team notes that the bank’s management is “very comfortable” with asset quality “with no particular weakness detected from internal stress tests”.
“While we believe 2QFY2022 credit cost would remain low (1QFY2022: 6 bps), management remains conservative, keeping credit cost guidance at 20-25 bps for FY2022,” it writes.
As at its report on July 12, OCBC’s share price is almost unchanged year-to-date (ytd), retreating from the 18% ytd gain seen in mid-February.
“While recessionary fears may persist in the near term, its decent dividend yield should provide share price support while the current P/BV of 0.9x (or -1 standard deviation from its historical mean) is undemanding,” the team says.