Fairly valued OCBC kept at 'neutral' by RHB with $12.20 target

PC Lee

SINGAPORE (Apr 23): RHB Research is maintaining Oversea-Chinese Banking Corp (OCBC) at “neutral” saying the stock is fairly valued.

In addition, OCBC’s 1Q19 non-interest income is expected to be “uninteresting”, given high 1Q18 base would make it challenging for 1Q19 to show growth.

And although NIM is expected to widen this year, RHB expects this to be narrower than peers.

“Prefer UOB and DBS,” says RHB.

In a Monday report, analyst Leng Seng Choon expects NIM expansion in 1H19 and digitisation efforts over the next 2-3 years to contribute to OCBC’s ROE enhancement.

This would be driven in the short term by sequential NIM expansion anf digitisation-driven expense management over the next 2-3 years.

In Jan/Feb, OCBC raised its home rate. This will raise lending yield for a portion of 1Q19 as more than half of OCBC housing loans are priced off this.

Lending yield should be even stronger in 2Q19 as the full three-month impact will be captured, adds Leng.

Industry-wide fixed deposit interest rates have also risen, but interest rates for CASA, which accounts for 66% of total deposits, have remained relatively flat – and this helps to cap the increase in OCBC’s cost of funds.

“We forecast 2019 NIM of 1.76%, an improvement over 2018’s 1.70% due to higher lending yields offsetting the rise in cost of funds,” says Leng.

Meanwhile, OCBC’s Bank of Singapore, which caters to clients with at least US$5 million ($6.8 million), saw 2018 AUM rise 3% to US$102 billion.

While AUM could have further increased since then, 1Q19 wealth management fees are likely to be soft y-o-y, Leng expects.

“We raised 2019F net profit by 7% to $4.7 billion, mainly due to net interest income forecast being increased by 7%. We introduce 2020 and 2021 forecasts in this report,” says Leng.

As at 10.47am, shares in OCBC are up 4 cents at $11.82.