OVERSEA-CHINESE BANKING CORP (SGX:O39)
OCBC - Capital Build-up Poses M&A Risks
- Recorded best y-o-y NIM performance amongst peers at +7bp in FY19; guides up to 7bp in FY20 NIM compression. We factor in -4bp on SIBOR strength.
- Expect credit costs to rise several bps due to outbreak. Most of the impact buffered by absence of O&G impairments (two-thirds of FY19 total) in FY20F.
- Reiterate HOLD with lower target price as we factor in credit costs for Covid-19.
- DPS raised to S$0.53 but M&A risks from high capital remains.
We expect insurance and wealth income to sustain FY20F earnings
- OCBC Bank (SGX:O39)'s FY19 earnings were lifted by strong wealth (fees +8% y-o-y) and insurance (+7% y-o-y) segments, as well as trading income (+92% y-o-y) primarily emanating from MTM gains from Great Eastern Holdings (SGX:G07).
- In FY20F, OCBC forecasts revenue to be affected by 2% from the virus outbreak, with most of this felt by segments such as credit cards. That said, we expect non-II momentum to continue; net new money growth should stay strong (BOS’s AUM +15% y-o-y to US$117bn) and we are positive on stronger insurance contributions from higher regular-premium product sales.
- We think NII growth could slow to 2% (vs. FY19’s 7%), as capped by reduced policy rates and the low-single-digit loan growth guidance in FY20F.
- OCBC expects y-o-y NIM compression of up to 7bp, but continued strength in S$ rates could provide some relief. At this juncture, we pen in -4bp y-o-y to 1.73% in FY20F.
4Q19 impairments mainly due to further write-down of O&G book
- Excluding one-off impairments for OCBC NISP’s IFRS9 adoption, FY19 provisions of S$746m translated to a higher 29bp credit cost (FY18: 12bp). SPs remained high at 41bp; two-thirds of this was due to a further write-down of its O&G portfolio for vessels with no visibility of upcoming charters for longer than a year.
- About 25% of upgraded NPLs (total upgrade/recoveries: S$664m) were related to this O&G exercise and recoveries are expected to continue into FY20-21F.
Several bps impact on FY20F credit cost from virus outbreak
- FY20F credit costs should improve as O&G issues (65% of FY19 impairments) clear up, but management guides for Covid-19 impairments to completely offset the improvement, and push y-o-y credit costs up by several bps. This implies a seemingly larger impact than peers have guided despite its smaller 6% loan exposure (c.S$16bn) to segments directly impacted by the outbreak (retail trade, hospitality, aviation, etc.).
- OCBC identified another 4% of its loan book as sensitive to 2nd order effects (e.g. manufacturing and trade related to China) – downside risks could stem from this book. We factor in credit costs of 29bp in FY20F – most of it due to the virus outbreak.
Reiterate HOLD; 1.06x P/BV inexpensive but virus could cap upside
- Dividend policy will now be on a progressive basis (previously 40-50% payout ratio), thus we raise FY20F DPS to S$0.53/share. OCBC is inexpensive at 1.06x P/BV (1 s.d. below mean), but we think downside risks of asset quality deterioration from Covid-19 may cap share price upside.
- Neutralisation of HK uncertainties is an upside risk.
- See OCBC Bank Share Price; OCBC Bank Target Price; OCBC Bank Analyst Reports; OCBC Bank Dividend History; OCBC Bank Announcements; OCBC Bank Latest News.
Andrea CHOONG
CGS-CIMB Research
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LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-02-23
SGX Stock
Analyst Report
11.64
DOWN
11.940
