OCBC - CGS-CIMB Research 2019-12-09: Plagued By Credit Cost Surprises


OCBC - Plagued By Credit Cost Surprises

  • Low-single-digit loan growth expected to continue into FY20F. NIMs likely to dip by c.5bp, but we think sustained wealth income should support earnings.
  • Robust 14.4% CET-1 ratio cements 40-50% dividend payout visibility, but M&A risks amid continuous capital accretion remain an overhang.
  • Maintain HOLD with GGM-based Target Price of S$11.94. We think that margin compression is priced in, but potentially higher credit costs may limit upside.

Sustained wealth should offset anaemic loan growth

  • OCBC (SGX:O39)’s loan growth lags its peers, clocking in at just 2% in 9M19. Management guides for the sluggishness to persist into FY20 in tandem with slower regional growth.
  • NIMs have started trending downwards on the back of multiple policy rate cuts by regional central banks. Margins are likely to slide further by c.5bp over FY20F, but we expect lower funding costs to cushion the blow.
  • Going forward, we expect continued strength from the non-interest income segments and wealth management income to stay resilient. Trading and investment income should contribute, but these returns are generally very sensitive to market movements.

Negative credit cost surprises and macro overlays weigh on OCBC

  • OCBC’s credit cost trends have been more volatile than its peers’, raising our concerns on the bank’s risk management guidelines and credit underwriting practices. The bank’s exposures to the O&G sector and its portfolio in Indonesia draw particular attention as they necessitated higher levels of impairments in FY19.
  • The bank had also set aside 7bp in general provisions (an adjustment to the macroeconomic variable in the ECL model) in view of the geopolitical tensions and slower regional economic growth. That said, results from the bank’s stress tests on a drop in rental income or real estate values for its HK portfolio have turned out benign.
  • Management is optimistic that an amiable resolution of the situation in HK (and possible recovery) is in sight, but we think that the cloud of negative sentiments could take some time to clear. Credit costs should tick downwards in FY20F barring further idiosyncratic deterioration.

Upside from stronger wealth offset by M&A risks. Maintain HOLD.

  • OCBC is inexpensive at 1.0x FY20 P/BV (-1 s.d. below its long-term mean), but compelling catalysts to re-rate the stock are limited, in our view.
  • See OCBC Bank Share Price; OCBC Bank Target Price; OCBC Bank Analyst Reports; OCBC Bank Dividend History; OCBC Bank Announcements; OCBC Bank Latest News.
  • We expect rate-cut pessimism to taper off, but an escalation of HK uncertainties remain a key downside risk. Re-rating catalyst is a neutralisation of the US-China trade tariffs.
  • The bank’s capital position is robust, with a CET-1 ratio of 14.4% as at end-Sept 2019. Its unsuccessful acquisition of an Indonesian bank is viewed positively given the credit-quality issues of the latter’s books and the prolonged timeframe for synergistic benefits.
  • Limited M&A prospects in the near term lead us to expect a larger dividend payout for FY19, but management’s tone in its 3Q19 results briefing suggests that its M&A deliberations could span a longer time horizon.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report HOLD MAINTAIN HOLD 11.940 SAME 11.940