Where next for the OCBC share price after a ‘record’ 2019?

Singapore’s second largest money lender by market capitalisation Oversea-Chinese Banking Corporation (OCBC) revealed its 2019 earnings last Friday 21 February, in which it posted ‘record’ profits.

OCBC posted stronger-than-expected 2019 earnings

The bank recorded a net profit of S$4.87 billion for the full year, 8% higher than the S$4.49 billion achieved in 2018.

For the fourth quarter of 2019, OCBC beat Refinitiv analysts' average net profit estimates of S$1.132 billion, hitting a core net profit of S$1.24 billion for the period, an increase of 34% from S$926 million a year ago.

The group also surprised market watchers with its decision to offer a final tax-exempt dividend of S$0.28 per share, which is a 22% increase from the final dividend of S$0.23 per share in 2018, and a 12% rise from FY19’s interim dividend of S$0.25.

Following the earnings release, OCBC shares rose as much as 0.82% to S$11.09 per share.

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OCBC Group CEO: revenue to be reduced by 2% in 2020

Despite the solid results – a widely-acknowledged fact, a soft outlook from the company regarding COVID-19’s impact on business has also kept analysts on the conservative side in their stock price outlook.

Group CEO Samuel Tsien had warned over the Q4 earnings call that the operating environment will ‘remain challenging’ for the rest of its 2020 fiscal year, with the global economic outlook ‘expected to be weaker than originally expected’.

As such, he estimated that the group's annual revenue for this year might be reduced by 2% thanks to the coronavirus crisis. He also hinted that loan growth could be lower this year, with China and Hong Kong accounting for 6% of its total loan client base.

‘We are watchful of the impact to our business and customers from the continuing trade tensions, heightened geo-political risks and the COVID-19 outbreak, and will extend support to customers to help them overcome the market challenges,’ he further noted in the Q4, adding that he hopes for the virus crisis to be contained by June 2020.

Analysts raise OCBC share price target, but only slightly

Phillip Securities analyst Tay Wee Kuang said that despite the positives of a higher dividend yield of 4.8%, as well as higher net interest, fee, insurance, and trading income; his growth outlook for the group remains muted in consideration of the coronavirus outbreak.

He said that any expected improvements may be offset by the impact of COVID-19, which has a potential of affecting the bank’s loan book by up to 10%.

However, he also noted that the bank ‘continues to exhibit a strong financial and capital position’, with its Common Equity Tier 1 ration – a measure of a bank’s capital against its assets – higher at 14.9% in 2019 as compared to 14% in 2018.

He maintained an ‘accumulate’ rating for OCBC’s stocks, albeit at a slightly higher share price target of S$12.10, up from S$11.70 previously.

Maybank Kim Eng’s Thilan Wickramasinghe commended the dividend increase as a ‘fresh’ and ‘progressive’ approach. He estimates that the final dividend payout for 2020 may amount to at least S$0.56 per share, which would mean a 5.1% yield on a 55% payout, versus 48% in 2019.

On the flipside, he predicts that near-term performance will be dominated by COVID-19 risks. Given the potential for a prolonged outbreak, he estimates that credit costs will be around 20 to 34 basis points between the 2020 and 2022, with non-performing loans also expected to rise to 1.7% in 2021 on the back of supply chain disruptions and falling consumption.

He also lowered his earnings per share forecast for 2020 by 4% to 7% to ‘account for COVID-19’s risks and higher provisioning costs’.

Weighing the risks and higher dividend expectations, Maybank Kim Eng raised its target price for OCBC to S$11.57 from S$11.26 previously, maintaining a ‘hold’ rating alongside a 5% upside.

OCBC shares are trading at S$10.67 per share as of 12pm on 28 February. Share price is down 3.3% year-to-date.

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