Oversea-Chinese Banking Corporation - UOB Kay Hian 2018-11-29: Steady And Sustainable Rise In Dividend Payout

OVERSEA-CHINESE BANKING CORP (SGX:O39) | SGinvestors.io OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corporation - Steady And Sustainable Rise In Dividend Payout

  • As CET-1 CAR at 13.7% is above the target range of 12.5-13.5%, we expect OCBC to improve dividend payout ratio towards mid-40%, bringing DPS to 48 S cents and dividend yield to 4.3% for 2019.
  • Great Eastern could make a contribution to the B40 Health Protection Fund to satisfy the foreign ownership requirement applicable to insurance companies operating in Malaysia. The amount of contribution would not have a significant impact on earnings.
  • Maintain BUY. Target price: S$14.05.



WHAT’S NEW


Finally realising potential for higher dividend payout.

  • Oversea-Chinese Banking Corporation’s (OCBC) CET-1 CAR has improved 0.4ppt q-o-q to 13.7% in 3Q18, above its target range of 12.5-13.5%.
  • OCBC’s dividend policy is to maintain a payout ratio at 40- 50% (2017: 37.7%). We see a possibility of OCBC moving its payout ratio towards mid- 40%. This could bring 2019F DPS to 48 S cents, which provides an attractive dividend yield of 4.3%.

Implementing IRBA for OCBC Wing Hang.

  • OCBC plans to implement an internal ratings-based approach (IRBA) to compute risk-weighted assets (RWA) for OCBC Wing Hang by 2019/20. OCBC Wing Hang’s RWA intensity was higher at 64% for 2017 vs 50.7% for OCBC on a group-wide basis.
  • We estimate OCBC would be able to reduce its RWA by 4% if OCBC Wing Hang lowers its RWA intensity to 50% under IRBA, and this would further improve OCBC’s CET-1 CAR by another 0.6ppt. The exercise could bring OCBC’s CET-1 CAR above 14%, further enhancing its capacity to pay more dividends.

Avoid divesting of 30% stake in GELM.

  • Great Eastern Holdings (SGX:G07) is in discussions with the authorities in Malaysia on various options to satisfy the foreign ownership requirement applicable to insurance companies operating in Malaysia. One of the options involves Great Eastern Life Assurance (Malaysia) (GELM) making a contribution to the B40 Health Protection Fund.
  • Based on options being considered, management believes there will not be a significant impact on earnings of Great Eastern Holdings and GELM. Discussions are on-going and details have yet to be finalised.
  • The B40 Health Protection Fund provides healthcare coverage for 36 critical illnesses for low-income households to be implemented from 1 Jan 19. The scheme provides protection for the bottom 40% of the population against hospitalisation for RM50 per day (maximum of 14 days) and RM700 p.a.. Malaysians can submit their claims online. The scheme will be managed by Bank Negara Malaysia.


STOCK IMPACT


Laggard in raising dividend payout ratio.

  • OCBC aims to provide steady and provide steady and sustainable dividends. Management plans to maintain dividend payout ratio at 40-50% of core earnings (2017: 37.7%), which can support growth of 6-7% for RWA and 10-12% for total assets.
  • Given that CET-1 CAR at 13.7% is above the target range of 12.5-13.5%, we expect OCBC to improve dividend payout ratio towards mid-40%, bringing DPS to 48 S cents and dividend yield to 4.3% for 2019.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our target price of S$14.05 is based on 1.37x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 10.9%, COE: 8.25% (Beta: 1.1x) and Growth: 1.0%).


SHARE PRICE CATALYST

  • We estimate that the implementation of internal ratings-based approach (IRBA) at OCBC Wing Hang would improve OCBC’s CET-1 CAR by 0.6ppt. The exercise is scheduled to be completed in 2019/20.
  • Non-interest income from wealth management, fund management and life insurance will em with growing affluence in Asia.





Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-29
SGX Stock Analyst Report BUY MAINTAIN BUY 14.050 SAME 14.050



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