SGX-listed Oversea-Chinese Banking Corp. Ltd. (SG:O39), or OCBC, has won the accolade of UOB Kay Hian analyst Jonathan Koh as the top banking pick for 2024. In a recent review, Koh downgraded the Singapore banking sector to a Hold rating, citing interest downcycle in 2024/25. Even so, he is bullish on OCBC owing to the bank’s commitment to maintain a dividend payout ratio of 50%.
Koh has a Buy rating on OCBC stock with a price target of S$16.85, implying over 30% upside potential from current levels. OCBC is one of the oldest and largest banks in Singapore, with a solid regional dominance. OCBC’s services span consumer/private banking, commercial banking, investment banking, treasury and markets, and insurance solutions. OCBC paid its most recent semi-annual dividend of S$0.40 per share on August 25, 2023.
Reasons for Analyst’s Bullish View on OCBC
The U.S. Federal Reserve has signaled probable interest rate cuts in the second half of this year and next, Koh noted. The analyst believes that the expected rate cuts will compress the net interest margin (NIM) and net interest income (NII) of most banks. Koh expects the interest rate downcycle to impact the Singaporean banks.
Koh expects OCBC’s NIM to reduce by 8 basis points in 2024 and by 22 basis points in 2025. Further, OCBC’s NII is forecasted to grow by 0.5% this year and fall by 5.9% in 2025. Meanwhile, its earnings are projected to decline by 4.1% in 2025.
Nonetheless, Koh likes OCBC because the bank has consistently delivered earnings growth while focusing on trade and investment flows. Plus, OCBC has a low P/B (price/book) ratio of 1.06x for FY2024, meaning it has room to grow. Moreover, as per the analyst, OCBC boasts the highest CET1 (common equity tier 1) capital adequacy ratio of 14.8% and the lowest non-performing loans ratio of 1%, signaling a healthy balance sheet.
All these factors have led Koh to believe that OCBC’s share price is expected to appreciate in the next twelve months and fare better than its peers.
Is OCBC a Good Stock to Buy?
With one Buy and two Hold ratings received during the last three months, O39 stock has a Moderate Buy consensus rating. On TipRanks, the Oversea-Chinese Banking Corp. Ltd. share price forecast of S$13.91 implies 7.6% upside potential from current levels. O39 shares have gained 12.5% in the past year.
