Why did JP Morgan cut its OCBC target price by 13%?

JP Morgan also downgraded their rating on the OCBC stock to ‘underweight’, citing the bank’s 10% scrip dividend discount as a key factor.

  • OCBC shares are up nearly 2% this week
  • JP Morgan analysts downgraded their OCBC rating to 'underweight' last month
  • OCBC is CIMB's 'least preferred' dividend stock

Oversea-Chinese Banking Corporation's (OCBC) share price is up as much as 1.8% this week, in the absence of any major market news over the long US Labour Day weekend.

As at 14:35 SGT on Tuesday 08 September 2020, the OCBC stock is trading at S$8.69 a share on the IG platform.

Latest client analysis shows that ‘sells’ form 82% of all OCBC trades so far this week. However, 98% of opened client accounts on OCBC currently hold ‘long’ (buy) positions, indicating an expectation for a price increase.

OCBC share price prediction: What's the latest?

Last month, JP Morgan analysts downgraded their rating on the OCBC stock to ‘underweight’ from ‘neutral’.

They also cut their share price target (with an end date of June 2021) by 13% from S$9.20 to S$8 a share.

The analysts stated that the ‘key driver’ of the OCBC rating downgrade is a 10% discount on scrip dividend.

While the scrip dividend discount in a ‘good strategy in theory’, the analysts noted that it is ‘not a given that the bank will necessarily be able to close a highly value-accretive deal soon’.

Furthermore, excess capital will be a drag on the bank’s return on equity, they added.

JP Morgan also estimated that OCBC’s net interest margin (NIM) is likely to be compressed by between 10 and 15 basis points. As such, they reduced their 2020 to 2022 NIM estimates for OCBC by 13% to 18%.

Across the board, OCBC has received a consensus rating of ‘buy’ from 21 analysts polled by Bloomberg as of 08 September 2020.

The stock also has a consensus 12-month target price of S$9.87, which represents a 13.6% upside from the last traded price of S$8.69.

Ready to trade OCBC shares?

CFDs allow you to buy (long) and sell (short) OCBC shares without trading the underlying assets. Open a live or demo account with IG today.

How does OCBC’s dividend estimates compare with DBS and UOB?

For OCBC shareholders, another key point of interest is the expected dividend pay-out over the next two financial years.

As we noted in a recent article ‘Singapore bank dividends: What’s the outlook?’, OCBC saw the second largest decline in interim dividends among the three Singapore banks in the first half of 2020.

The group proposed an interim one-time tax-exempt dividend of S$0.159 per share, which works out to be 36.4% lower than the amount of S$0.25 paid a year prior.

Under MAS’ new guidelines for dividends per share (DPS) to be capped at 60% of 2019’s total sum, the maximum DPS that OCBC can declare for FY2020 would be S$0.318, against FY 2019’s total DPS of S$0.53.

This would equate to a maximum dividend yield of 3.66% for this financial year, based on the latest share price.

In their latest note, DBS brokers stated that they prefer UOB over OCBC for its higher dividend yield of 3.9%, adding that they ‘remain cautious over OCBC’s larger exposure to regional small and medium enterprises in Hong Kong and Indonesia’.

Meanwhile, CIMB had called OCBC their ‘least preferred’ dividend pick, citing the bank’s ‘unexpected credit costs and volatile treasury income’ as key factors.

Looking further ahead, JP Morgan wrote that the ‘dividend outcome is reasonably opaque’.

They hypothesised that Singapore banks will continue to pay the current MAS mandated dividends until the end of 2021, with banks focused on earnings sustainability rather than the interests of shareholders.

How to trade OCBC with IG

Are you feeling bullish or bearish on the OCBC share price?

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 Corporation> 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

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
liveprices.javascriptrequired
liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.