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.
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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.
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