Oversea-Chinese Banking (SGX:O39): NIM May Face Pressure During Interest Rate Cut Cycle
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On May 10th, Oversea-Chinese Banking Corporation Limited $OCBC Bank (O39.SG)$released its Q1 earnings report, which resulted in a 2% increase in its stock price. Since the beginning of the year, the stock price of this commercial bank has continued to rise by 13.28%, significantly outperforming Singapore's FTSE Straits Times Index, which has risen by 2.51%. In May alone, OCBC's stock price increased by 4.9%, second only to Yangzijiang Shipbuilding and Yanlord Land Group in the Singapore market.
Brief Introduction of OCBC
Established in 1932, OCBC is the oldest bank in Singapore. It was formed through the merger of three local banks and achieved growth through acquisitions in key markets such as Singapore, Malaysia, Indonesia, and Greater China. OCBC has over 600 branches and representative offices in 18 countries and regions. In addition, OCBC holds around 88% of the shares in Great Eastern Holdings, the largest insurance company in Singapore and Malaysia in terms of assets under management.
OCBC's operations include consumer banking; wealth management and private banking (through its Bank of Singapore subsidiary); small to midsize enterprise and business banking; corporate and institutional banking; and insurance through majority-owned Great Eastern.
Among them, Global Wholesale banking and Consumer banking have the highest proportion in revenue, accounting for 45.84% and 37.85% respectively.
So, what reasons have prompted his stock price to continue to rise since 2024?
Significant Increase in Revenue Level
In Q1 2024, OCBC Group's net profit was approximately SGD 1.98 billion, a year-on-year increase of 5% and a quarter-on-quarter increase of 22%. Earnings per share were SGD 1.76, a year-on-year increase of 24%. Total revenue was SGD 3.63 billion, an increase of 8% year-on-year. Both interest income and non-interest income increased to varying degrees:
1. Interest income: The increase in market interest rates and optimization of asset allocation drove the increase in net interest income. In Q1 2024, interest income was approximately SGD 2.44 billion, a year-on-year increase of 4%, and the net interest margin was 2.27%, which was basically flat compared to the previous quarter.
2. Non-interest income: Non-interest income mainly includes fees and commissions, trading income, insurance business income, etc. Thanks to the increase in customer activity and the improvement in market performance, OCBC's non-interest income in Q1 was approximately SGD 1.19 billion, a year-on-year increase of 17%.
Continuous Excellent Asset Quality
In addition to revenue growth, OCBC's asset quality remained at a good level in Q1. Loans grew by 1%, and asset quality was sound, with a non-performing loan ("NPL") ratio steady at 1.0%. The Group's capital, funding, and liquidity positions remained robust, providing flexibility to support business growth and handle uncertainties.
Take, for example, the $1 billion global covered bond programme, which has recently given a significant boost to companies' share prices.OCBC has priced €500 million of fixed-rate covered bonds due 2027. The net proceeds will be used for general corporate purposes and the bonds, expected to be listed on the Singapore Exchange on June 12, will bear a fixed interest of 3.29% per annum, payable annually in arrears. The bonds are expected to be rated "AAA" by Moody's Investors Services and "AAA" by Fitch Ratings and will be guaranteed as to payments of interest and principal by Red Sail, which will secure the guarantee with a portfolio of assets purchased from OCBC.
In May, OCBC completed the acquisitions of Great Eastern and PT Bank Commonwealth. Great Eastern is the largest insurance company in Singapore and Malaysia in terms of assets under management. PT Bank Commonwealth is a private bank in Indonesia that focuses on providing a range of banking services to individual and corporate clients. The acquisition brings more than 1.2 million PTBC customers to OCBC Indonesia.
In addition, OCBC plans to spend HKD 1.5 billion on technology and office upgrades over the next three years to strengthen its businesses in Hong Kong and Macau, according to multiple media reports. The bank has been accustomed to continually strengthening its market position in wealth management, insurance, and other businesses through mergers and acquisitions, while continuing to expand its operations around the world to diversify potential political and economic risks.
OCBC has always been an actively engaged listed company in repurchasing its shares to support its stock price. In 2023, OCBC had the highest amount of share buybacks on the Singapore market, repurchasing 16.41 million shares for a total amount of SGD 140 million. The repurchase of company shares can reduce the number of outstanding shares, thereby increasing the earnings per share ratio without changing earnings, while also conveying confidence in the company's value and prospects to the market, providing a dual boost to the stock price.
Since the beginning of 2024, OCBC has continued its uninterrupted share buyback program, with a frequency of at least once a week. As of the end of 2023, the company's free cash flow was SGD 8.59 billion, a year-on-year increase of 1.62%. Currently, there are no major financial issues, but it is necessary to continue monitoring whether the acquisitions will bring financial risks.
What are the market expectations for OCBC's EPS in the next two years?
In 2023, OCBC's earnings per share were SGD 1.55, a year-on-year increase of 27.05%. For 2024/2025, CFRA Equity Research has given a cautious estimate of earnings per share of SGD 1.63/1.72, with an annualized growth rate of around 5%, which is slower than the growth rate in 2023. The basic logic behind this forecast includes the following:
Negative factors:
Loan demand slowing down: Due to the sluggish Singapore housing market and tightened loan standards, loan growth in 2024 is expected to remain in the low single-digit percentage, leading to a slowdown in loan demand and a decrease in loan interest income.
Expected decline in NIM: NIM is the net interest margin of a bank, which is the ratio of the bank's net interest income to its average interest-earning assets. Net interest income refers to the net amount of interest income earned by the bank from loans and investments, minus the interest cost paid to depositors. In 2023, with the rise of market interest rates and excellent asset allocation, OCBC's NIM increased, driving an increase in net interest income and significantly improving earnings per share. CFRA predicts that by 2024, the growth effect of this NIM expansion will weaken, leading to a slowdown in net interest income growth to low single-digit percentage. This may be due to the stabilization of the impact of market interest rate changes on bank revenue or rising deposit costs offsetting the growth in loan income.
Cost pressure: OCBC is continuously expanding and undergoing digital transformation, which may put pressure on the company's costs.
Positive factors:
Expected increase in non-interest income: Great Eastern Holdings' core insurance business remains strong, and it is expected that OCBC will use its private banking and insurance expertise to expand its wealth management business. Meanwhile, investment income will be enhanced due to the improvement in market performance. CFRA analysts expect OCBC's non-interest income to grow by 4%-5% in 2024.
Overall, CFRA believes that cost inflation and slowing growth in interest income may have a negative impact on profit margins. However, the growth in non-interest income may partially offset this negative impact.
Continuous growth in dividend per share, committed to providing stable shareholder returns
Thanks to OCBC's strong capital position, the company will maintain its dividend growth trend. Currently, the company's dividend yield is 5.60%, higher than the 4.87% of peer DBS Bank and the 5.20% of United Overseas Bank, making it highly attractive in terms of dividends. In the first half of 2024, the company declared a dividend of SGD 0.42 per share. Based on past history, it is highly likely that the dividend will continue to increase in the second half of the year, which is something to look forward to!
Currently, OCBC's P/E ratio is 9.21x, which is basically at the same level as the industry average. As of June 13, the stock price was SGD 14.29, which still has some room for upward movement compared to CFRA's target price of SGD 15.
In the short term, it is difficult for the stock price to experience a significant decline due to the company's ongoing high-density share buyback behavior. In the medium term, the expected interest rate cut by the Federal Reserve will directly affect the stock prices of global financial institutions, and OCBC will not be immune. In the long term, with the company's strong risk resilience and market adaptability, this financial institution will still be very fundamentally strong and robust.![]()
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friend688 : Seriously wrong. Let make a record of your statement. Revisit in end July 2024. It’s nonsense facts.
friend688 : When interest rate cut? It’s next year 0.25% only
CY90 friend688 : the lower the better.
Paul Anthony : very nice
friend688 Paul Anthony : Interest rate will remain high for few more years. Suppose Fed cut interest rate in Oct2024 during US presidency election, it’s only mere 0.25% each deduction and next year 2025 suppose they cut another two times 0.25% in June & Nov 2025 as planned by Fed. Total is only 0.25 x 3 times = 0.75% that my friends are still lower than 1%. Meaning now interest rate running at 5.5% & cutting 0.75%, we are still facing high interest rate of 4.75% rate. THUS 4.75% WILL GO INTO 2026. (Above data & news are referenced from CNBC analysis). To add the main focal point our local banks have ALL FACTORED IN the three rate cuts into their loan computation already. Thus recently UOB one account announced they are not giving 5% for $100K savings with them. They had moved to 4% for $150K higher savings with them.
Ondel Ondel : Stay clear of DBS (Singapore). Fiance' worked there, not a great environment.