Eyeing dividend cap lift and better 2QFY2021 earnings
CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have maintained “add” on Oversea-Chinese Banking Corp (OCBC) with an unchanged target price of $13.75, before the bank announces its results for the 2QFY2021 ended June on August 4.
In their report dated July 5, Choong and Lim say they expect some “normalisation” in OCBC’s earnings following the exceptional trends seen in the 1QFY2021.
In 1QFY2021, OCBC saw strong treasury income from large customer flow volumes amid a steepening yield curve. Earnings were also boosted by elevated wealth management income on the back of a risk-on sentiment, rebound in loan growth, and stabilisation in asset quality.
“We think it would be a feat to repeat another record quarter given tamer financial markets and pencil in more modest earnings,” write the analysts.
“Furthermore, the extension of movement restriction orders in Singapore and the rest of the region in 2QFY2021 could see management turning more cautious on asset quality ahead,” they add.
To this end, the analysts have postponed their expectations on impairment writebacks of around $400 million in management overlays to FY2022.
That said, Choong and Lim say they expect OCBC to post a net profit of $1.15 billion in the 2QFY2021, representing a 46% increase y-o-y and a 23% decline q-o-q.
Net interest margins (NIMs) may be sustained at 1.56% in the 2QFY2021, supported by continued optimisation in OCBC’s balance sheets and steady benchmark rates.
The analysts also expect q-o-q growth of 1.1% in terms of corporate loans growth. The growth, they add, should be more apparent in the 2HFY2021.
On the other hand, the bank is estimated to post an 18% decline q-o-q in non-interest income, which accounts for Choong and Lim’s expectations of a q-o-q drop in net profit.
“We think broad-based fee income could dip 11% q-o-q (+18% y-o-y) on the back of lower business volumes due to the regional movement restrictions,” they write.
“At the same time, we expect some normalisation in wealth management and treasury income in 2QFY2021 on the back of risk-off sentiment (albeit a structural improvement in assets under management or AUM base built over previous quarters) and lower customer flows given tamer financial market movements.”
Due to the regional movement restrictions, Choong and Lim have pencilled in some 30 basis points of credit costs in the 2QFY2021 to account for the perceived higher risks.
The analysts have estimated dividends of 25 cents per share in the 1HFY2021 on the basis that the Monetary Authority of Singapore (MAS) would have lifted its dividend cap on banks by then.
Downside risks to the counter, according to the analysts, are weaker repayments from loans post-moratoriums.