OCBC Bank - Maybank Kim Eng 2020-02-23: Better Pay Out

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

OCBC Bank - Better Pay Out


Covid-19 uncertainty, but better dividend visibility

  • OCBC Bank (SGX:O39)’s 2019 earnings came marginally ahead of MKE/Street bolstered by trading income. Allowances for credit losses though came in significantly higher than our already bearish assumptions. While this was mostly from legacy O&G exposure, elevated credit costs are unlikely to abate given risks to customers from the Covid-19 epidemic and slower North Asian growth.
  • Nevertheless, we welcome OCBC's move towards progressive dividends and managing excess capital. This lowers earlier risks to dividend visibility and M&A uncertainty.
  • We have raised our Target Price by 3% to SGD11.57. Maintain HOLD.
  • We prefer UOB (SGX:U11) for stronger ASEAN exposure.



Near term likely dominated by Covid-19 risks

  • Management claims Covid-19 Tier-1 impact sector (hospitality, F&B, airlines etc.) exposure is 6% of loan book, while Tier-2 (manufacturing etc.) is a further 4%. A Tier-1 distress may raise credit charges towards 25-30bps, based on OCBC estimates.
  • Given the rapidly evolving situation and potential for a prolonged outbreak, we estimate credit costs of 20- 34bps in 2020-2022E (2019 34bps including special charge in Indonesia). We also expect NPLs to rise to 1.7% by 2021E (from 1.5%) from supply chain disruptions and falling consumption.


Focus on dividends a strong positive

  • OCBC’s fresh progressive dividend approach will see it paying at least the previous year’s per share quantum. In 2019, total dividends increased 23% y-o-y. Based on this, we estimate 2020E dividends may be at least SGD0.56 – which offers a 5.1% yield (55% pay out vs.48% 2019). See OCBC Bank Dividend History.
  • Management also claims they are not looking at any immediate transactions for M&A. Overall, this lowers a significant portion of uncertainty in terms of OCBC’s capital deployment and yield visibility, in our view.


Raising Target Price to SGD11.57. Maintain HOLD






Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-02-23
SGX Stock Analyst Report HOLD MAINTAIN HOLD 11.57 UP 11.260



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