Broker's take: CGS-CIMB upgrades OCBC to 'add' on attractive valuation, share price resilience

CGS-CIMB has upgraded OCBC to "add" from "hold" as the bank's shares now trade close to their 0.8 price-to-book value ratio seen during the global financial crisis (GFC), dipping 27 per cent year-to-date.

It also noted the lender's share price was more resilient than its peers during the GFC and Asian financial crisis.

However, it lowered its target price for OCBC to S$9.04 from S$11.05 as part of an overall target price cut for the banking sector.

OCBC shares were up S$0.10 or 1.2 per cent at S$8.18 as at 10.15am on Friday.

OCBC's lower valuation "discounts some of the incoming sector headwinds, such as margin compression due to the Fed (US Federal Reserve) rate cuts, asset quality pressure on small and medium enterprises and corporate clients amid the Covid-19 pandemic", said CGS-CIMB.

CGS-CIMB analysts said they were comforted by OCBC's thick capital buffers even though they are counterintuitive to raising shareholder returns.

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They also noted OCBC had maintained its dividends per share throughout past periods of negative growth.

Meanwhile, CGS-CIMB cut its forecast for OCBC's net interest margins, along with the other Singapore banks, following the 100 basis points Fed rate cut.

It expects margins for the lender to fall by 15 basis points year-on-year (y-o-y) to 1.63 per cent for fiscal 2020, and by four basis points y-o-y to 1.59 per cent in FY2021.

However, the Monetary Authority of Singapore could provide a monetary boost for banks by shifting to a neutral policy stance and this could slow the three-month Singapore Interbank Offered Rate dip, CGS-CIMB noted.

Insurance income, sustained fees and churn from wealth management and mark-to-market gains from its insurance arm Great Eastern Holdings could offset net interest income weakness, it added.