Brokers' take: Analysts mixed on OCBC after Q4 results miss consensus

ANALYSTS are mixed on OCBC after the bank posted a lower than expected net profit and revenue for Q4 FY2021, below consensus expectations by about 19 per cent.

In a research report on Wednesday (Feb 23), Maybank Securities downgraded its call OCBC to "hold" from "buy" and lowered its target price to S$14.04 from S$14.67.

Meanwhile, on Thursday, RHB and DBS Group Research maintained their "buy" calls on OCBC with different target prices. RHB lowered its target price to S$14.40 from S$14.80 and DBS raised its target price to S$15 from S$14.

Maybank analyst Thilan Wickramasinghe said that even with rising rates supporting interest income, the bank is still exposed to volatility and lower earnings due to its large dependence on markets-linked income sources.

He believes that medium term return on equity (ROE) could be depressed because there is limited guidance on OCBC's large common equity tier 1 capital base. The analyst estimates OCBC's average ROE for FY2022 to FY2024 to be 122 to 363 basis points below its peers, UOB and DBS.

Regarding OCBC's new strategy to drive growth and plans to deepen wealth capabilities, Wickramasinghe said more detailed targets and deliverables are needed to monitor success.

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Additionally, risks of higher non-performing loans (NPL) need to be considered given the potentially stronger new strategy driven loan growth, he said after highlighting that Q4 FY2021 NPLs saw a 31 per cent increase quarter on quarter.

Although he sees upsides to interest income, the analyst is of the opinion that there are additional risks to earnings visibility and potential offsets to net investment income (NII) gains as close to 50 per cent of OCBC's non-interest income is linked to market volatility, compared to a lower 20 to 38 per cent for DBS and UOB.

Expected earnings per share for FY2022 and FY2023 were upgraded as higher operational expenditure and allowances offset NII gains, he said.

He also set dividend payout to 49 per cent in the medium term given limited clarity on capital levels. This translates to a lower multi-stage dividend discount model target price of S$14.04.

On the other hand, RHB said its lower target price factors in higher equity risk premium.

The research team pointed out that OCBC's earnings and dividend payout have returned to pre Covid-19 levels but it believes that in the near term, the bank will still see share price underperformance compared to its peers.

The dampening of OCBC's share price is attributed to the jump in allowance expense and regional non performing loans in Q4 FY2021, the team added.

The team, nonetheless, still views the risk return as favourable with OCBC's current valuation at an expected 1 times price to book value ratio for FY2022. It also projects net profit to grow 16 per cent year on year in FY2022 and FY2023.

RHB kept its net profit estimates the same for FY2022 as it said projections of higher operating income on upward revisions in loan growth and fee income are offset by assumptions of higher operational expenditure and provisions.

For FY2023, the team raised net profit by 8 per cent to represent an improved net interest margin, stronger loan growth and higher fee income.

The research team has also factored in its projection of one rate hike per quarter for 2022 in its estimates for OCBC.

In contrast, DBS raised the target price on OCBC on the back of a higher expected return on equity of 10.5 per cent instead of 10 per cent previously.

The target price is equivalent to an estimated 1.23 times price to book value ratio for FY2022, which is about 0.5 standard deviation above its 12-year forward price to book value multiple.

The research team is of the opinion that OCBC is "poised for growth". It expects economic recovery and a higher interest rate environment which OCBC's net interest margin will potentially benefit from.

DBS has a positive outlook for the bank as well with its new corporate strategy focused on driving growth and building on their strengths.

The team added that higher dividends may also be a share price catalyst, given OCBC's common equity tier 1 ratio of 15.5 per cent which is above the optimal operating level.

Shares of OCBC were trading down 4.7 per cent or S$0.59 to S$11.97 as at 11.45 am on Thursday.