Oversea-Chinese Banking Corporation (OCBC) - UOB Kay Hian 2020-01-03: Ample Capital Buffer, Eyeing Expansion In China

OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corporation (OCBC) - Ample Capital Buffer, Eyeing Expansion In China

OCBC (SGX:O39) has the highest CET-1 CAR at 14.5% as of 3Q19, significantly above the minimum requirement of 9.0%. Implementing IRBA at OCBC Wing Hang, which is scheduled to complete in 2020, will lead to reduction in RWA intensity and provide a further boost to CET-1 CAR. We estimate 2020F payout ratio at 47.7%, which is at the higher end of its policy of maintaining payout ratio at 40-50%.

Management for guided slower loan growth of 2-3%, NIM compression of 5bp (assumes one more cut in FED funds rate) and higher credit costs of 22-25bp for 2020.

OCBC targets to further expand and double PBT from the GBA to S$1b by 2023, representing a 5-year CAGR of 11%. This is supported by loan growth of 12% p.a. to S$80b by 2023. OCBC intends to capture cross-border flows by helping corporate customers in Southeast Asia and Hong Kong expand into the Pearl River Delta (PRD) and GBA. Management expects Greater China to account for 20-25% of group PBT by 2023 (2018: 19%).
OCBC plans to increase its stake in BON above the existing 20% if China liberalises its banking sector to allow for greater foreign participation.

Wealth management fees grew 11% y-o-y while AUM expanded 5% y-o-y to US$110b in 3Q19. AUM from Greater China has recorded the highest growth. AUM for discretionary portfolio management grew by 5% y-o-y.

OCBC has the highest CET-1 CAR at 14.5% as of 3Q19. OCBC plans to implement an internal ratings-based approach (IRBA) to compute risk-weighted assets for OCBC Wing Hang, which will lead to reduction in RWA intensity. Management expects IRBA to be approved and fully implemented in 2020.

We expect OCBC to keep its DPS unchanged at S$0.50 for 2020F, which represents a payout ratio of 47.7%. This is at the higher end of OCBC’s dividend policy to maintain payout ratio at 40-50%. Accumulating OCBC at S$9.10 would provide an attractive dividend yield of 5.5%. See OCBC Share Price; OCBC Dividend History.

OCBC provides an attractive 2020F dividend yield of 4.6%. Our target price is based on 1.40x 2019F P/B, derived from the Gordon Growth Model (ROE: 11.0%, COE: 8.00% and Growth: 0.5%). See OCBC Target Price.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-01-03

SGX Stock Analyst Report BUY MAINTAIN BUY 14.450 SAME 14.450