The valuation discount is based on three factors, the analysts note.

$DBS Group Holdings (D05.SG)$ $OCBC Bank (O39.SG)$ $UOB (U11.SG)$
First, asset quality risks are weighing on Singapore bank stocks as a result of a possible recession in 2023-2024.

This is due to these institutions taking “slivers of risk” across geographies, and not unique to OCBC.

Another factor that is more specific to OCBC is that the bank has accumulated capital in the last few years, with limited clarity on capital use, which has led to worries on value-eroding deals.

While DBS and UOB closed multiple deals in the last two years, such as the merger of Lakshmi Vilas Bank into DBS India in Nov 2020, and UOB’s $3.6 billion acquisition of $Citigroup (C.US)$ ’s Asean assets. On the other hand, OCBC did not have any such deals.

They also reiterate the point that communication on return of excess capital has been limited, but this point can be immediately addressed and that is likely “enough for the stock to re-rate in the near-term.”

In 4QFY2022, the analysts expect earnings to grow 4% q-o-q, and they think that growth in its net interest margin (NIM) should continue, albeit at a slower pace as the cost of financing catches up.

They also project that OCBC’s non-interest income should remain steady, with fee income close to 3QFY2022.