Analysts say OCBC’s net profit could drop by 32% in Q2

Oversea-Chinese Banking Corporation (OCBC) (SGX: O39) will be reporting its second quarter results for financial year 2020 (FY2020) before the market opens on Friday 07 August 2020.

Below, we highlight three areas that investors should be aware of ahead of the earnings report.

OCBC stock fell 5% after MAS lowered dividends

OCBC’s share price has fallen as much as 4.9% since last Thursday 30 July 2020, when the Monetary Authority of Singapore (MAS) announced new restrictions requiring local banks to cap their dividend pay-outs for the 2020 financial year at 60% of FY2019’s final amount.

MAS also advised local banks to offer shareholders the option of receiving the dividends to be paid for FY2020 in scrip in lieu of cash.

The 60% cap on the local banks’ FY2020 dividends is intended to help banks balance the objective of capital conservation with the interests of shareholders, the central bank further noted.

As at 11:30 SGT on Wednesday 05 August 2020, OCBC shares have recovered slightly, and are trading at S$8.63 each.

IG’s market analysis shows that ‘buys’ form 52% of all trades on the OCBC counter so far this week. In terms of sentiment, 97% of IG client accounts are currently holding ‘long’ (buy) positions on the OCBC stock, with only 3% on ‘short’ (sell). This indicates that the expectation is for OCBC’s share price to rise in the near term.

For the month of July, the OCBC stock descended nearly 6%, and was down by as much as 7% at one point. This was less pronounced than DBS’ decline but on par with UOB’s during the same period.

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OCBC's 2020 dividend yield likely to drop to c.3.7%

IG market strategist Pan Jingyi said in a previous client note that although MAS’ advisory had ‘perhaps been a milder recommendation’ compared to other central banks’ orders, this would ‘nevertheless diminish the attractiveness of (Singapore banks’) shares in the short-term if adopted’.

A 60% cap on FY2019 dividends per share (DPS) would mean that OCBC's FY2020 DPS will max out at S$0.318 (based on 2019's full-year sum of S$0.53). Based on the latest traded share price of S$8.63, OCBC’s dividend yield is also likely to drop from c.6% in 2019 to c.3.7% this year.

Pan added that investors should watch the bank’s earnings performance against consensus and guidance ‘for any disappointments that could see (share) prices be susceptible to declines once again’.

On a technical basis, she wrote that OCBC had seen share price on a downward slide going into July, with the downtrend unfolding alongside the rest of the local banks.

Selling pressure, she added, had also gathered with the latest advisory to cap dividends, sending prices to trade below the 38.2% Fibonacci retracement level.

‘That said, prices had once again found good support at S$8.50 that had also curbed further declines earlier in Q2 2020. Momentum remains weak for OCBC, watching either a break below the support, which seems unlikely in the short-term without a strong trigger, or a break above S$8.90 resistance to relieve some downside pressure,’ Pan concluded.

Across the board, the OCBC stock has received an average share price target of S$9.37 per share from six analysts (representing an 8.6% upside from the last traded price), alongside a consensus rating of ‘buy’ from 19 brokers surveyed by Refinitiv.

OCBC Q2 net profit estimated to fall by 32%

In terms of earnings estimates, analysts polled by Refinitiv are expecting for OCBC’s earnings per share to come in 24.1% lower year-on-year at S$0.218 per share, with net income forecasted to drop more sharply by 31.7% to S$835 million in Q2 FY2020.

Analysts also see OCBC posting a Q2 FY2020 DPS of S$0.26, up from S$0.25 per share a year prior, although these figures had been provided before MAS’ dividend advisory.

According to Citi analyst Robert Kong, OCBC is potentially looking at a year-on-year net profit decline of 29% for the June ending quarter.

Meanwhile, CIMB’s Andrea Choong and Lim Siew Khee foresee that Singapore banks will record stronger trading and investment gains in the second quarter on the back of better market performance, offsetting some of the headwinds from narrowing net interest margins.

On OCBC, they said the bank ‘may surprise on the upside from a rebound in portfolio revaluations’ from its insurance arm Great Eastern Holdings.

Finally, Maybank analyst Thilan Wickramasinghe highlighted higher provisioning costs, ‘significant’ drops in interest rates driving negative pressure on net interest margins, as well as non-performing loans during the Covid-19 lockdown period as key areas to note in the upcoming Q2 earnings.

How to trade OCBC with IG

Are you feeling bullish or bearish on OCBC shares? Either way you can buy (long) or sell (short) the asset using derivatives like CFDs offered on IG's industry-leading trading platform in a few easy steps:

1. Create a live or demo IG Trading Account, or log in to your existing account
2. Enter <Oversea-Chinese Banking Corp Ltd> in the search bar and select the instrument
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade