OCBC overtakes DBS as Morgan Stanley’s most preferred bank stock

The Wing Hang acquisition overhang is clearing.

OCBC has overtaken DBS as Morgan Stanley’s preferred Singapore bank stock. According to analyst Nick Lord, OCBC provides a combined play on steady global growth recovery accompanied by steady rise in nominal interest rates.

The report stated that rising rates should help lift OCBC’s net interest margins, which in turn will drive ROE improvement. OCBC is also poised to benefit from its exposure to GEH as insurance companies tend to outperform banks in a rising rate environment.

“We currently see the most upside at OCBC, and it replaces DBS as our favored Singapore bank. Whilst it is not quite as geared into rising rates as DBS, it is the most levered of the Singapore banks post its acquisition of Wing Hang, and as of September 2014, had a fully loaded core equity tier 1 (CET1) ratio of 10.1% compared to 12.1% at DBS and 12.5% at UOB. We expect that scrip dividends will help it to close the CET1 gap with peers during 2015, and that as this happens it will re-rate relative to peers. Were it to make any asset disposals in 2015 (something management has noted is possible in the past), the gap could close even faster,” the report noted.