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We Adjust Our FVE for Singapore’s OCBC to SGD 16

We see upside potential for future dividends.

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Securities In This Article
Oversea-Chinese Banking Corp Ltd
(O39)

We maintain our narrow-moat rating on Oversea-Chinese Banking Corporation O39, or OCBC, and lower our fair value estimate to SGD 16.0 from SGD 17.5 after fourth-quarter earnings and upon change of coverage analyst. Our new fair value estimate is equivalent to 1.40 times book value at the end of 2022 and represents 26% upside to the current share price, a similar amount of upside as exists to our fair value estimate for rival United Overseas Bank, or UOB, and a bit more than the 19% upside we see for rival DBS. Our fair values for UOB and DBS are equivalent to 1.57 times book value for UOB and 1.86 times for DBS, reflecting differences in our assumptions for the midcycle ROE of each bank. We put OCBC’s midcycle ROE at 12.7%, compared with around 13% for UOB and around 16% for DBS.

OCBC’s lower ROE than its Singaporean rivals does not reflect a lower return on assets (at least not compared with UOB) but rather OCBC’s excess capital pushing down its ROE through the denominator effect. OCBC management aims for a dividend payout ratio of 50% and says that it does not in principle plan to conduct buybacks (except to neutralize any dilution from employee share grants), so we project that its excess capital would steadily increase further if it does not boost shareholder returns and/or conduct significant M&A. Given OCBC’s track record of successfully growing in Asia through acquisitions, such as in the private bank area and insurance in Singapore and in commercial banking in Indonesia and Greater China, we think it’s likely management could choose to add to organic growth with more acquisitions in coming years, should good targets be available at reasonable prices. We assume OCBC pays out an average of 54% of earnings over our forecast horizon, above its 50% goal, including special dividends.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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