CGSI downgrades OCBC on sharp share price gain, less attractive yield, but raises target price
Brokerage moves the stock to ‘hold’ with a target price of S$28.40
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[SINGAPORE] CGS International (CGSI) downgraded OCBC to “hold” in its research report on Tuesday (Jul 21), citing limited upside following a sharp run-up in the lender’s stock price and a relatively less-attractive dividend yield compared with its banking peers in Singapore.
Despite the rating downgrade, CGSI analysts Tay Wee Kuang and Tan Jie Hui raised the target price on the stock to S$28.40 from S$26. They lowered their market risk premium assumption to 5.5 per cent from 6 per cent, citing stabilising macroeconomic conditions. This reduced the stock’s cost of equity to 7.8 per cent from 8.4 per cent previously.
However, with OCBC trading at S$28.69 at the time of the report, the new target price implies a downside of 1 per cent.
“Given its roughly 19.1 per cent rise in share price since June, we believe OCBC will only rerate further after it demonstrates better return-on-equity (ROE) expansion,” CGSI noted.
The brokerage expects visible ROE expansion to manifest only in FY2028, following the completion and integration of HSBC Indonesia’s wealth management business, which management targets to wrap up by mid-FY2027.
Furthermore, CGSI noted that with OCBC set to complete its capital return exercise by the end of FY2026, the bank will revert to its standard 50 per cent core dividend payout ratio.
This translates to an estimated FY2027 dividend yield of roughly 3.2 per cent, trailing its local peers. DBS’ figure stands at roughly 4.8 per cent, and UOB’s at around 4.5 per cent.
CGSI expects OCBC to announce a net profit of S$1.93 billion for the second quarter of FY2026. This would be a 6.4 per cent increase year on year and a 2.1 per cent decrease quarter on quarter.
The analysts project S$3.83 billion in Q2 revenue, which would be an 8.1 per cent year-on-year rise, and a 0.1 per cent quarter-on-quarter growth.
CGSI raised its earnings per share estimates by 2.1 per cent across FY2026 to FY2028, as it sees “scope for OCBC to realise synergies between its wealth management and insurance franchise”.
Wealth management fees are expected to surge 43.4 per cent year on year to S$400 million and asset quality is expected to remain intact, with credit costs steady quarter on quarter at 23 basis points.
Factors that may shape the path ahead
The analysts outlined several key factors that could sway the bank’s trajectory.
Upside risks include potential US Federal Reserve rate hikes that could lift the Singapore Overnight Rate Average and expand net interest margins.
They also pointed to stronger loan growth resulting from reallocating capital away from lower-yielding liquid assets, and accelerated net new money inflows into the high-ROE wealth management business.
Conversely, downside risks involve higher-than-expected integration costs for the HSBC Indonesia wealth business, a macroeconomic downturn leading to elevated provisioning, and slower wealth inflows relative to peers.
CGSI’s downgrade comes after Citi put another local bank – UOB – on a 30-day downside catalyst watch last week.
Shares of the three local banks had surged to record levels earlier in July, helping lift the Straits Times Index to new highs.
But, Citi said on Friday that the market has been “overly optimistic” in pricing in an asset quality turnaround for UOB.
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