RHB has downgraded OCBC : O39 0%to “neutral” from “buy” to reflect limited upside potential, weakness in China’s macroeconomic recovery and peaking net interest margins (NIM) ratio.

In its report on Wednesday (Jul 5), the research team lowered its target price to S$13.20 from S$14 following an earnings revision. This led to a lower intrinsic value of S$12.98 of the stock from S$13.70. 

RHB cut its forecast after assuming more conservative NIM ratios. It expects NIM to compress by eight basis points for FY2024, and another five basis points for FY2025. This is in contrast to the earlier forecast that NIM would remain stable for the period.

This comes as RHB expects the US federal funds rate (FFR) to ease to 4.6 per cent in 2024 and 3.4 per cent in 2025, even though the FFR has the potential to rise between 5.5 per cent and 5.75 per cent by end-2023 due to sticky inflation. 

Any reduction in rates could result in NIM compression for banks, including OCBC, said RHB. It now projects OCBC’s FY2024-25 net profit to drop by 6 per cent to 8 per cent. 

Assuming no further rate hikes or rate cuts for the rest of the year, the research team estimates OCBC’s FY2023 NIM guidance to be at 2.2 per cent, compared with 2.3 per cent in Q1. 

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This NIM compression is due to factors such as the ongoing repricing of deposits, liquidity drag from healthy new money inflows and “generally cautious investor sentiment”.

The shift in deposit mix from current accounts and savings accounts to fixed deposits seems to have slowed as banks ease up on the interest rate competition, RHB said. 

The research team expects the bank’s Q2 results to be in line with Q1. Loan growth will remain “subdued”, as China’s reopening will take time to recover and weak macroeconomic data resulted in weaker trade-related financing. 

RHB also believes OCBC is “well-positioned to capitalise on the growing Asean-Greater China business flows over the medium to long term” in the region, as trade activities were up at a compound annual growth rate of 13 per cent between 2018 and 2022.

Shares of OCBC were down 0.7 per cent or S$0.09 to S$12.26 as at 3.15 pm on Wednesday.