OCBC Bank (SGX:O39): Navigating the Dividend Cut – A Long-Term Dividend Stock Under the Microscope

Investors in OCBC Bank (SGX:O39) have been watching closely as the regional banking giant announced a 7.14% reduction in its 2025 interim dividend, from 44 cents to 41 cents per share. While the cut may raise eyebrows, a deeper analysis of the bank's earnings dynamics, payout ratios, and strategic initiatives reveals a nuanced story of resilience and long-term sustainability. For income-focused investors, the question remains: Is OCBC still a compelling dividend stock in a low-interest rate world?

The Drivers Behind the Dividend Cut

OCBC's decision to trim dividends is rooted in a challenging macroeconomic environment. The bank's net interest margin (NIM) has compressed from 2.20% in 2024 to 1.92% in Q2 2025, driven by a sharp decline in Singapore and Hong Kong interbank rates. This has led to a 6% year-on-year drop in net interest income to S$2.28 billion. With 80% of its Singapore dollar loans on floating rates, OCBC is particularly exposed to rate normalization, a trend expected to persist as central banks globally signal prolonged high rates.

However, the bank is not without tools to offset these pressures. Non-interest income has emerged as a critical buffer, rising 5% year-on-year to S$1.26 billion in Q2 2025. Wealth management fees surged 24% to S$279 million, while trading income grew 6%, showcasing OCBC's ability to diversify revenue streams.

Payout Ratio: Prudence Over Panic

OCBC's current payout ratio stands at 50.8%, down from 60% in 2024, reflecting a more conservative approach to capital preservation. The bank has maintained a disciplined target of a 60% payout ratio for full-year 2025, ensuring it balances shareholder returns with financial resilience. This is particularly prudent given its 0.9% non-performing loan (NPL) ratio and a CET1 capital ratio above 15%, both of which position the bank to absorb near-term shocks.

Compared to industry peers like DBS and UOB, OCBC's payout ratio remains competitive. While Singaporean banks typically maintain payout ratios between 45% and 60%, OCBC's trajectory suggests a measured approach to sustainability. The 5.16% dividend yield—still the highest among the Big Three—further supports its appeal, even after the cut.

Strategic Levers for Long-Term Sustainability

OCBC's long-term dividend sustainability hinges on its ability to innovate and diversify. The bank has invested heavily in digital transformation, deploying AI-powered tools like A.I. Oscar and HOLMES AI. These initiatives have already boosted retail trading account growth by 95% and staff productivity by 20%, with a projected 1–2% annual earnings lift by 2027.

Equally compelling is OCBC's pivot to sustainable finance. Climate-related loans surged 31% to SGD 37.96 billion in 2024, and the bank aims to generate SGD 1.2 billion in sustainable banking revenue by 2027. This aligns with global ESG trends, offering a tailwind for earnings growth in an increasingly regulated financial landscape.

Geographically, OCBC is diversifying its risk profile. Acquisitions like PT Bank Commonwealth in Indonesia and its expanded stake in Great Eastern Holdings are broadening its revenue base. With two-thirds of its loan book now in domestic-focused sectors, the bank is insulating itself from trade-dependent volatility.

Investment Implications

For long-term investors, OCBC's dividend cut should be viewed as a strategic recalibration rather than a red flag. The bank's strong capital position, cost discipline (38.9% cost-to-income ratio), and non-interest income growth provide a robust foundation for dividend sustainability. While the 50.8% payout ratio may seem conservative, it ensures OCBC can maintain payouts even in a prolonged low-margin environment.

The key risks lie in global trade tensions and the success of digital and ESG initiatives. Investors should monitor quarterly updates on sustainable banking revenue and OCBC's ability to maintain ROE above 12%. A capital return plan of SGD 2.5 billion—including dividends and buybacks—also offers additional shareholder value.

Final Verdict

OCBC Bank remains a compelling long-term dividend stock, albeit with a tempered near-term outlook. The dividend cut is a calculated move to preserve capital and navigate macroeconomic headwinds, supported by a resilient capital base and strategic diversification. For investors seeking a blend of income and growth, OCBC's disciplined approach and forward-looking initiatives make it a standout in the banking sector. While the yield has dipped slightly, the bank's fundamentals and strategic agility suggest that its dividend story is far from over.

Investment Advice: Consider a strategic entry into OCBC for a long-term portfolio, particularly if you prioritize dividend sustainability and are comfortable with moderate near-term volatility. Monitor the bank's sustainable finance progress and NIM trajectory for further confidence in its dividend trajectory.