OCBC's Price-to-Book Ratio Suggests Defensiveness Amid Key Risks and Downgrades

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Chart 1: OCBC Weekly Chart

OCBC reported a 39% YoY growth in profits to $1.88 billion, beating consensus estimates, with net interest income up 56% (y-o-y) and non-interest income down 11%. 

Non-performing loan ratio improved to 1.1%, but loan growth targets were revised downward due to recent cooling measures. The net interest margin outlook was revised upward to 2.2%, but there is limited upside for OCBC's NIMs as the Fed rate cycle nears its peak, with pressure from funding costs. 

Asset quality remains benign, but management will top up general provisions in a more uncertain environment. The analysts downgraded OCBC to HOLD with a target price of S$13.00, citing limited catalysts for share price growth and downside risks arising from NIM, loan growth, and rising asset quality risks. 

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Chart 2: OCBC Monthly Chart with Historical Price-to-Book Ratio

While key risks include deteriorating asset quality, larger-than-expected NPLs, high inflationary pressure, and recessionary risks; the price-to-book is close to 1 which is reasonable, with dividend yield at about 6% - and these 2 matrix suggest OCBC is possibly more defensive than UOB and DBS. 

Banking Sector Update (17th May 2023):

For the first quarter, the banks exceeded market expectations due to elevated net interest margins resulting from an interest rate hike. The wealth management segment also experienced a sequential rebound, with DBS leading at 39%, followed by OCBC at 33% and UOB at 27%. 

However, the banks predict that net interest margins will likely peak in the first quarter as interest rate hikes taper off. They expect a moderation or slight decline in the margins, along with a slowdown in loan growth due to cooling measures implemented by the Singapore government. Fee income growth is also anticipated to moderate as corporate and equity markets remain subdued. UOB is expected to benefit from the integration of its Southeast Asian operations, while OCBC maintains its net interest margin guidance. 

The price-to-book ratios of UOB and OCBC suggest more attractive valuations compared to DBS, which has higher ratios. Singapore banks could benefit from the flight to safety as funds seek stronger banks amid global uncertainties.