Analysts remain positive on OCBC as bank maintains dividend payout ratio at 50% moving forward

Analysts are all keeping their &ldquo add&rdquo and &ldquo buy&rdquo calls on Oversea-Chinese Banking Corporation (OCBC)  after the bank reported its results for the  FY2022 ended Dec 31, 2022, on Feb 24.

 

OCBC : O39 +0.24% reported net profit of S$1.3 billion for the fourth quarter ended December 2022, rising 34 per cent from S$973 million the previous year, as net interest income hit a new quarterly high.

 

Speaking at the bank&rsquo s results briefing on Friday (Feb 24), OCBC group chief executive Helen Wong noted that the bank delivered all its financial targets for 2022, as it focused on executing its corporate strategy that it rolled out in 2021.

 

She said: &ldquo The performance was very much attributed to foundations that we have put in place in the previous few years as we steered through the pandemic.&rdquo

 

But the bank&rsquo s earnings for the quarter still missed the S$1.6 billion average estimate based on four analysts polled by Bloomberg.

 

OCBC&rsquo s net interest income for Q4 rose 60 per cent or S$894 million to S$2.4 billion, driven by a 79 basis point (bps) rise in net interest margin (NIM), as the increase in loan yields outpaced the rise in funding costs.

 

For the full year, NIM rose about 37 bps to 1.91 per cent. Credit costs stood at about 16 bps, down around 13 bps from the previous year.

 

The bank guided for NIM in FY2023 to be around 2.1 per cent. Wong noted that interest rates will likely continue to rise, but expects it to plateau off and even taper in the second half of 2022.

 

&ldquo I don&rsquo t want to paint too rosy a picture as we go into the rest of the year,&rdquo she added. For FY2023, Wong expects more catch-up on the cost of funding, and less upside from loans as the interest rate cycle comes to an end.

 

As interest rates remain high, customers may continue to pour into fixed deposits &ldquo for a while further&rdquo , which will likely impact the bank&rsquo s current and savings account ratio and further competition for deposits, she said.

 

But Wong is positive that the bank&rsquo s key markets will remain resilient and that its diversified business franchise will deliver growth, particularly as the earlier-than-expected China reopening could support regional economies.

 

In the region, Wong said that she does not rule out the option of expanding the bank&rsquo s presence. &ldquo But we are quite happy with what we have, and the important thing is to strengthen the capabilities,&rdquo she added.

 

Wong said that the bank is focused on its &ldquo one-group approach&rdquo , which involves group-wide collaborations to serve customers as a single relationship across markets. This should help it stay nimble and navigate the uncertain economic environment, she felt.

 

Non-interest income declined 42 per cent to S$615 million, largely from lower wealth management fees, as a result of subdued customer investment activities amid market headwinds, as well as valuation losses from its insurance arm Great Eastern.

 

On Wednesday, Great Eastern posted a 37 per cent decline in its second-half net profit to S$281.3 million, as the &ldquo negative impact of financial market movements&rdquo adversely impacted the valuations of its insurance contract liabilities.

 

The bank&rsquo s non-performing loans ratio for Q4 was 1.2 per cent, down 0.3 percentage point from the previous year. Total allowances of S$314 million were 1 per cent below the previous year.

 

The lender declared a final dividend of S$0.40 per share, bringing the total dividend for FY2022 to S$0.68 per share, up S$0.15 or 28 per cent from the previous year. 

 

This represents a dividend payout ratio of 53 per cent for FY2022. The bank is targeting a dividend payout ratio of 50 per cent.

 

Given that OCBC has sufficient capital, Wong noted that the group will not rule out paying higher dividends, such as with Q4&rsquo s 53 per cent payout ratio. But she added that it is important for the lender to &ldquo look at how we manage our capital position and how to support our growth&rdquo .

 

She said: &ldquo We have a three-year strategy we expect a faster organic growth. But as the market reopens, we are also looking at inorganic opportunities (to grow).&rdquo  

 

According to Wong, the bank is &ldquo not short of opportunities&rdquo when it comes to acquisitions, but she added that it prefers to look in markets where it has a presence, and for companies that can result in a better combined synergy.

 

OCBC group chief financial officer Goh Chin Yee also noted that the clearer dividend policy &ldquo demonstrates our confidence in generating quality earnings growth&rdquo . The dividend policy also signals that the lender will increase returns to shareholders, while supporting the bank&rsquo s move towards a more optimal Common Equity Tier 1 (CET1) ratio in the future.

 

OCBC&rsquo s CET1 ratio stood at 15.2 per cent as at December 2022, on the back of profit accretion and a decline in risk-weighted assets.

 

Net profit for the full year grew 18 per cent to a record S$5.7 billion, from S$4.9 billion for FY2021. This translates to an earnings per share of S$1.27 for FY2022, up 18 per cent from S$1.07 for FY2021.

 

Wong is projecting a mid-single-digit loan growth for FY2023, and for credit costs to be between 15 and 20 bps.