Will OCBC Reclaim $13?

Hey, everyone. It's been a long time since I've posted - I apologize, I've been busy with personal projects and school. After the recent market dip, I received a few queries regarding local bank stocks and their viability. I've always thought about adding a bank stock to my portfolio for the purposes of diversification, but never got around to it. So I thought today would be a good time to take a look at OCBC Bank (O39).

A couple of weeks ago, the US Federal Reserve announced a hike to its benchmark interest rate - an increase to 2.25% from 2%. Interest rates in Singapore (e.g. SIBOR) are likely to increase, mirroring the rise in US interest rates. This could represent a potential driver of growth for the bank's Net Interest Margin (NIM = Interest Earned minus Interest Paid Out). Mortgage loans are likely to be a big contributor - loans with floating interest rates would entail higher interest payments for the bank. Earlier this year, OCBC Management had already stated intentions to reprice certain portions of its Singapore mortgage book during the latter half of 2018. Despite increases in SIBOR in early-2018, mortgage loan growth has reportedly remained consistent, and I do not expect property-related loans to decrease. Mortgages currently account for roughly a quarter of OCBC's total loans.

The bank's first two quarters reflected positive year-on-year growth in net profit, with increases of 29% and 16% in 1Q18 and 2Q18, respectively. Customer loans and deposits have been growing, entailing decent liquidity and capital. This growth, however, was slightly impaired by OCBC Malaysia's performance in 1H18, where Net Profit decreased by approximately 2% year-on-year.

Source: Yahoo! Finance

Having derived an estimated dividend growth rate of 7.59% from the bank's ROE (through the use of ROE times Retention Ratio), the forecasted dividend is $0.40. Using the Gordon Growth Model (DDM), we obtain a target price of $13.83, with rising interest rates being the catalyst for short-term price growth. This is a conservative estimate, but since OCBC is currently trading near 1.1x - 1.2x book value, I would definitely keep my eye on this stock. I am redeveloping a war chest - when the time comes, I will perform a cursory re-examination of the stock before I buy it. 

OCBC closed at $10.75 on Friday, 12th October. 

Until next time.


Creed