Analysts rate OCBC shares a ‘buy’ as dividend outlook improves

Shares of Oversea-Chinese Banking Corp (OCBC) are currently trading at just under S$9 per share, an improvement of 14.3% since our last share price update on Singapore's main three banks in March 2020.

Between February and March, the Singapore money lender saw its stocks crash roughly 30% in value, dropping to S$7.81 a share – a level not seen since April 2016.

OCBC’s share price has recovered slightly in the last one week, following the Singapore government’s S$59.9 billion coronavirus three-part fiscal budget most recently unveiled on 06 April. However, this is still some ways below the company’s 2020 peak of S$11.20 achieved on 17 January, just a week prior to the coronavirus outbreak.

The coronavirus pandemic continues to worsen in Singapore, with 622 new infections confirmed over the long Easter weekend. This takes the total number of Covid-19 cases in the country to 2,532.

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Monetary Authority of Singapore unveils relaxing measures for banks

Apart from the government stimulus, Singapore banks received a further boost after the Monetary Authority of Singapore (MAS) announced on 07 April a series of fiscal measures aimed at helping financial institutions to focus on dealing with issues related to the Covid-19 pandemic and supporting their customers during this time.

As part of the measures, Singapore financial companies will be allowed to adjust their capital and liquidity requirements to help sustain lending activities; set more realistic accounting loan loss allowances by taking into account the government’s latest fiscal assistance and banks’ relief measures; as well as defer implementation of the final set of Basel III reforms, margin requirements for non-centrally cleared derivatives, and other new regulations and policies, to ease operational burdens.

Singapore’s central bank also said in the same announcement that it does not see a need to restrict banks’ dividend policies, though the release of capital buggers should not be used to finance share buybacks during this period.

New guidelines to improve OCBC’s dividend visibility

Following these announcements, Maybank analysts have given the OCBC stock a ‘buy’ rating, with a 12-month price target of S$10.32 per share.

Maybank analyst Thilan Wickramasinghe named OCBC as his preferred equity bank, given its gearing to Southeast Asia and a deposit mix that should see relatively lower impact from falling rates.

Furthermore, he noted that even prior to the new regulatory measures, Singapore banks were already well capitalised and had high levels of liquidity at around a CET-1 ratio that is 530 basis points higher than the regulatory minimum.

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He believes that these new measures are ‘more of a supportive signal for the sector to keep liquidity flowing, while also providing some clarity to the markets in terms of credit charges’.

He added that the MAS’ explicit clarification that it sees no need to restrict dividends also supports the Singapore banking sector’s strong dividend visibility and defensiveness regionally. As a result, this ‘clarity on dividends provides significant visibility for the 6.4% 2020E yield currently offered by the sector’, Wickramasinghe wrote.

He had previously predicted that OCBC's final dividend payout for 2020 may amount to at least S$0.56 per share (versus 2019's $0.53 per share - to be paid out on 05 June), which would mean a 5.1% yield on a 55% payout, versus 48% in 2019.

Finally, he stated that while operating conditions may remain volatile as this pandemic progresses – trading below 1x 2020E PB with a dividend yield amongst the highest in the region, he is still confident that the Singapore banks offer defensive value at this point in the cycle.

Following the Singapore government’s third Covid-19 stimulus in two months – amounting to 12% of Singapore’s gross domestic product, including a 75% wage offset applicable to all Singapore firms and other business financial support schemes – UOB analyst Adrian Loh has maintained an ‘overweight’ impact on the banking sector.

He also gave the OCBC stock a ‘buy’ rating and a 12-month target price of S$10.36 per share, citing the government’s increase of its risk share from an already substantial 80% to 90% for loans made under the Temporary Bridging Loan Programme, the Enterprise Financing Scheme – SME Working Capital Loan, and Enterprise Financing Scheme – Trade Loan, as an incentivisation for Singapore banks to extend more loans to viable small and medium businesses.

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