OCBC - CGS-CIMB Research 2019-11-05: Heightened Credit Costs On Weaker Macro


OCBC - Heightened Credit Costs On Weaker Macro

  • OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)'s 3Q19 results were characterised by heftier S$323m provisions and -2bp NIM q-o-q. Sustained wealth income and lower CTI. IFRS9 costs were the culprit.
  • Management guides for low-single-digit loan growth in FY20, slightly lower NIMs and 20-25bp credit costs. We cut NIM estimates 1-5bp in FY19-21F.
  • Maintain HOLD with lower Target Price of S$11.94 as we roll forward to CY20.
  • M&A plans remain an overhang on OCBC as CET-1 holds strong at 14.4%.

OCBC expects one more Fed cut; ‘slight’ NIM compression in FY20

  • Policy rate cuts from regional central banks and pressure on loan yields resulted in NIMs falling 2bp q-o-q in 3Q19. OCBC’s house view holds out for one more Fed rate cut in the next 12 months.
  • While funding cost savings should begin to come through from 4Q19 onwards, particularly given management’s subdued loan growth outlook of low single-digits in FY20, management guides for a potential slide in SIBOR to result in NIM compression at the lower end of the 5-10bp range.
  • We cut our NIM estimates by 1-5bp to 1.77%/1.73%/1.72% in FY19-21F, and lower our loan growth forecasts to 3% (from 4%) in FY19-20F. 9M19 core earnings formed 77% of our full-year forecast.

Heftier 27bp credit costs due to corporate NPLs and macro overlay

  • Significantly higher loan loss provisions of S$323m (or 49bp) were the key drag to 3Q19 earnings (2Q19: S$111m). Several factors contributed to this:
    • an adjustment to the macroeconomic variable (MEV) on stage 1 and 2 loans due to geopolitical tensions and slower regional economic growth (S$48m or 7bp),
    • two corporate NPLs (OSV and semi-conglomerate in transport industry), and
    • a one-off S$144m (or 22bp) charge relating to OCBC NISP’s adoption of IFRS9 in Jan 2020.
  • Excluding the IFRS9 impairments, underlying credit costs stood at a higher 27bp in 3Q19 (2Q19: 17bp). Management guides for credit costs to trend higher to 20-25bp in FY20 as it anticipates some weakening in regional operations. See OCBC Bank Announcements.
  • Downside risks: prolonged HK uncertainties.

Benign results from stress-testing HK rental and property values

  • Although the MEV adjustment hints towards potential credit deterioration, the asset quality indicators of its Hong Kong portfolio have not shown signs of weakness; its NPL ratio has held steady at 0.4% - the lowest amongst OCBC’s regional operations. Stress testing its HK portfolio for a 30-40% drop in rental income, or a similar decrease in real estate values, showed an insignificant impact.
  • Separately, net new NPA formation was significantly higher at S$818m (2Q19: S$338m), pushing NPL ratio to 1.5% (from 1.4%); most of this was due to the two corporate accounts mentioned above.

Maintain HOLD with a lower GGM-based Target Price of S$11.94

  • The bank’s 14.4% CET-1 ratio stands tall against its ‘efficient’ ratio of 12.5-13.5%, but this further fuels M&A queries given the excess capital and its scrip dividend scheme.
  • The bank remains on the lookout for M&A prospects; we think acquiring an Indonesian bank could fit its strategy and provide scale, but reaping the benefits may take years.
  • See OCBC Bank Share Price; OCBC Bank Target Price.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 11.94 DOWN 12.530