OCBC&rsquo s results for 4QFY2023 should not surprise, but dividends may: RHB

 

The Singapore research team at RHB Bank Singapore has kept its &ldquo neutral&rdquo call on Oversea-Chinese Banking Corporation (OCBC) ahead of the bank&rsquo s results for the 4QFY2023 and FY2023 ended Dec 31, 2023, on Feb 28.

 

To the team, the bank&rsquo s results for the final quarter should come as expected although its dividends may be a surprise.

 

For the FY2023, the team expects the bank&rsquo s results to meet their estimates as well as that of the consensus.

 

&ldquo A peaking rates cycle will likely lead to income pressures and dampen share price performance of Singapore banks under coverage. However, decent dividend yield should provide downside support,&rdquo it writes.

 

On a q-o-q basis, the team is expecting a slight easing in the bank&rsquo s 4QFY2023 bottomline on the back of lower non-interest income and catch-up on operating expenditures (opex). However, OCBC&rsquo s earnings should still register y-o-y growth from a stronger net interest income (NII) and lower loan impairments.

 

For the quarter, the RHB team expects to see sustained loan growth with weakness in trade-related loans cushioned by stable mortgage and non-trade corporate lending.

&ldquo OCBC noted pockets of aggressive mortgage pricing in 4Q, but refrained from competing aggressively despite its ample liquidity. 3QFY2023 loan book contracted by 2% YoY (+1% y-o-y, constant currency terms) and for FY2023, growth should look broadly similar (FY2023 guidance: low-single digit growth),&rdquo says the team.

 

Meanwhile, the bank has ample liquidity (with a loan-to-deposit ratio of 79.9% for the 3QFY2023), which has allowed it to run off some of the costlier fixed deposits to keep funding cost pressures manageable.

 

&ldquo Recall that 3QFY2023/9MFY2023 net interest margin (NIM) of 2.27% and 2.28% were trending ahead of the [estimated] 2.25% guidance. OCBC had guided for a weaker 4Q NIM q-o-q on muted loans growth, deposit competition and lower exit NIM (of 2.23%) &ndash all of which appear to have shaped up as expected,&rdquo says the team.

 

The final quarter of the year is a seasonally soft one for wealth management activities and the RHB team expects OCBC&rsquo s 4QFY2023 results to be no exception. The team also expects the bank&rsquo s trade- and loan-related fees to reflect the continued softness in loans growth.

 

However, card fees are expected to be a &ldquo bright&rdquo spark for the bank, similar to one of its peers, whose card fees remained healthy in the 4QFY2023 thanks to the holiday season.

 

Overall, non-interest income in the 4QFY2023 is unlikely to excite, unless insurance and non-customer flow trading income surprises positively.

 

Other positives identified by the team: the bank&rsquo s asset quality, in which the team expects to see relatively stable credit cost q-o-q in the 4QFY2023 and the acquisition of PT Bank Commonwealth

 

The latter is a &ldquo smallish, bolt-on acquisition&rdquo that will help OCBC Indonesia&rsquo s operations broaden its product offerings such as auto financing, as well as help it build scale. There is also little overlap in the customer base between both parties.

 

&ldquo Near-term, the deal is not likely to have any major impact on capital or earnings but should be positive over the longer term,&rdquo says the RHB team.

 

While the team has no changes to its earnings forecasts, it expects a final dividend per share (DPS) of 38 cents, which would bring OCBC&rsquo s DPS for the FY2023 to 78 cents, above the 68 cent-dividend in FY2022. FY2023&rsquo s estimated dividend represents a yield of 6% and a payout of 49.5%.

 

The team has lowered its target price to $13.40 from $13.70 to reflect its new 0% environmental, social and governance (ESG) premium and, or discount after a change in the country&rsquo s median ESG score.