OCBC Bank: Delivering, but Need Clarity on Capital Returns
OCBC Bank: Delivering, but Need Clarity on Capital Returns
Broker: Maybank Research Pte Ltd
Date: November 8, 2024
Introduction
In this comprehensive financial report, we dive deep into the performance and future prospects of several prominent banking institutions, including OCBC Bank, DBS, and UOB. This analysis provides an in-depth look at their financial metrics, market strategies, and the overall outlook for investors.
OCBC Bank: Delivering, but Need Clarity on Capital Returns
OCBC Bank has shown commendable execution in its operations, but there remains a need for more clarity on capital returns. The bank’s 9M24 core earnings surpassed both MIBG and Street expectations, driven by a robust recovery in non-interest income (NoII) and solid trading income. However, the lack of a clear strategy for capital returns remains a concern for investors.
Non-Interest Income Moving in the Right Direction
OCBC’s NoII has made significant strides, contributing 36% of total income in 3Q24 compared to 28% a year ago. This improvement was largely fueled by a remarkable 29-fold increase in the bank’s own trading income year-over-year. Wealth management also saw a 25% YoY improvement, while trading customer flow increased by 46% YoY, indicating heightened client risk-taking. This positive momentum is expected to continue, with a 3-4% increase in NoII assumptions for 2024-26E.
Some Protection for NII Downside
Despite a slight 2bps QoQ retreat in net interest margins (NIMs), OCBC has strategically deployed assets to low-risk, low-yield instruments to hedge against falling rates. The potential for higher interest rates under a new Trump administration could present upside risks to net interest income (NII). Concurrently, loan activities are picking up, especially in ASEAN, which could offset margin weaknesses.
Vague Capital Returns an Overhang
OCBC aims for a medium-term CET1 ratio of 14%, down from the current 17.2% due to BASEL4 transitional uplift. This implies around SGD4bn-7bn of excess capital. Unlike DBS and UOB, OCBC has not provided a clear strategy for capital returns, causing uncertainty among investors. Although management prefers dividends over share buybacks, there is no clear indication of how much higher this could be above the 50% payout guidance.
Financial Metrics and Performance
OCBC achieved a share price of SGD 16.06 with a 12-month price target of SGD 17.89, indicating an 11% upside. The bank’s market capitalization stands at SGD 68.4B, with a 52-week high/low of SGD 16.06/12.37. Core net profit for FY24E is projected at SGD 7,721 million, with a net dividend yield of 5.7% for the same period.
3Q24 Results Summary
OCBC reported net interest income of SGD 2,433 million, with non-interest income rising by 41% YoY to SGD 1,369 million. Total income increased by 11% YoY to SGD 3,802 million. The bank’s cost/income ratio improved to 38.5%, and core net profit rose by 9% YoY to SGD 1,974 million.
Key Assumption Changes
The bank’s net interest income for 2024E is projected at SGD 9,924 million, with non-interest income expected to reach SGD 4,414 million. Overall, total income for 2024E is anticipated to grow by 1% to SGD 14,338 million. Gross loans are expected to increase by 1% to SGD 309,427 million, while deposits are projected to remain stable at SGD 374,538 million.
DBS: Steady Performance with Clear Capital Returns
DBS has maintained a steady performance with a clear strategy for capital returns. The bank’s share price stands at SGD 42.40, with a 12-month target price of SGD 46.91, indicating a positive outlook for investors. DBS continues to lead with strong capital levels and a clear pathway for capital returns through dividends and share buybacks.
Financial Metrics and Performance
DBS’s operating income for FY24E is projected at SGD 14,338 million, with a core net profit expected to reach SGD 7,721 million. The bank’s net dividend yield for FY24E is projected at 5.7%, with a core P/E ratio of 9.3x.
UOB: Clear Pathway for Capital Returns
UOB has demonstrated a clear pathway for capital returns, making it a preferred choice for investors. The bank’s share price stands at SGD 35.69, with a 12-month target price of SGD 38.75. UOB’s capital returns strategy includes higher dividends and share buybacks, providing a clear and aggressive approach compared to OCBC.
Financial Metrics and Performance
UOB’s operating income for FY24E is projected at SGD 14,338 million, with a core net profit expected to reach SGD 7,721 million. The bank’s net dividend yield for FY24E is projected at 5.7%, with a core P/E ratio of 9.3x.
Conclusion
Overall, OCBC Bank has shown commendable performance in its core operations, but the lack of clarity on capital returns remains a concern. In contrast, DBS and UOB have provided clear strategies for capital returns, making them more attractive options for investors. As the banking sector navigates market volatility and interest rate changes, these institutions’ ability to adapt and provide clear strategies will be crucial for their continued success.
