OVERSEA-CHINESE BANKING CORP (SGX:O39)
Oversea-Chinese Banking Corp (OCBC) - 2020 Dividend Yield Has Crept Up To Above 5%
- We saw stable NIM on a q-o-q basis driven by improvement in CASA ratio and NIM expansion in Hong Kong, Malaysia and Indonesia. Fees grew 17% y-o-y driven by wealth management (+31% y-o-y). NPL ratio receded a significant 13bp q-o-q due to huge upgrades/recoveries of S$537m.
- OCBC rewarded long suffering shareholders by hiking final dividend by 22% y-o-y to 28 S cents.
- OCBC trades at 2020F P/B of 1.0x and dividend yield of 5.1%.
RESULTS
- OCBC Bank (SGX:O39) reported strong results with net profit of S$1,243m for 4Q19 (+34% y-o-y), above our forecast of S$1,063m. On a full-year basis, OCBC achieved net profit of S$4,869m in 2019, the third consecutive year of record earnings.
Moderate but steady loan growth.
- Loans expanded 2.7% y-o-y and 0.7% q-o-q in 4Q19, driven by corporate loans. Growth was centred in non-core markets of Asia Pacific outside ASEAN (+5.5% q-o-q) and the Rest of World (+6.7% q-o-q).
NIM expansion from overseas markets.
- NIM expanded 5bp y-o-y but was stable q-o-q at 1.77% in 4Q19. Loan yield eased as 3-month SIBOR and SOR receded 11bp and 14bp q-o-q respectively to 1.77% and 1.54%. Cost of deposits receded by a significant 15bp q-o-q. CASA ratio improved 2ppt y-o-y to 48.4% (savings deposits: +8.8% y-o-y, current accounts: +5.6% y-o-y).
- NIM expanded by 8bp, 9bp and 29bp q-o-q respectively to 1.84%, 2.08% and 4.06% for Hong Kong, Malaysia and Indonesia.
Wealth management driven by continued expansion in AUM.
- Fees up 17% y-o-y, driven by wealth management (+31% y-o-y), credit cards (+5% y-o-y), loans-related fees (+15% y-o-y) and transaction banking (+8% y-o-y). AUM grew 15% y-o-y to US$117b.
Contributions from insurance boosted by mark-to-market gains.
- Contributions from life insurance and general insurance grew 27% and 12% y-o-y respectively. New business embedded value (NBEV) margin improved 4.5ppt y-o-y to 50.6% due to shift in product mix towards regular premium products. Growth was boosted by mark-to-market gains for investment portfolios.
- Net trading income increased 74% q-o-q to S$316m due to growth in customer flows. Gains from shareholders’ fund at Great Eastern have also boosted net trading income.
Asset quality improved.
- NPL ratio receded a significant 13bp q-o-q to 1.45% due to upgrades/recoveries and write-offs for accounts in the oil & gas support vessels and services (OSV) sector. Net upgrades/recoveries for corporate/commercial banking were S$537m (25% from the OSV sector). Provisions declined 36% q-o-q to S$207m.
Rewarding long suffering shareholders.
- Final dividends were at 28 S cents (scrip dividend not applicable), up 22% y-o-y and 12% hoh, and higher than our forecast of 26 S cents. Dividend payout ratio was 46% for 2019, within its policy of 40-50%.
- CET-1 CAR remains the highest among local banks at 14.9%, boosted by retained earnings and its scrip dividend scheme.
STOCK IMPACT
Guidance for 2020.
- Management guided on slow loan growth of 2-3% for 2020. OCBC previously guided on NIM to narrow by about 5bp (higher than 1.70% in 2018 but lower than 1.77% in 2019). Operating expenses are tightly controlled and management still targets to achieve steady cost/income ratio of 40%.
Hefty provisions for OSV sector in 2019.
- 65% of total provisions of S$890m taken in 2019 were due to NPLs in the OSV sector. OCBC has taken a conservative approach to value offshore support vessels (collaterals) which are coming off charter and not able to secure term renewals at scrap value (about 6% of market value). These hefty provisions are unlikely to be repeated in 2020.
- Management expects more upgrades recoveries in the OSV sector in 2020 and 2021.
COVID-19 exerts short-term negative impact in 1H20.
- Management sees first order impact from the outbreak of COVID-19 on the hospitality, retail, food & beverage, entertainment and aviation industries, which accounts for 6% of total loans. The second order impact relates to manufacturing companies affected by disruption in supply of components from China or affected by drop in demand from China, which accounts for 4% of total loans.
- Management expects the outbreak of COVID-19 to end by Jun 20. However, consumers’ propensity to spend could remain curtailed in 3Q20 and return only in 4Q20 (stabilised).
- Management estimates the negative impact from the outbreak of COVID-19 at 2% of revenue. Credit costs are expected to be a few bp above 25bp (25-30bp).
EARNINGS REVISION/ RECOMMENDATION
- We trimmed our earnings forecast for 2020 by 0.6% due to slight tweak in credit costs (25.5bp to 26.5bp).
- Maintain BUY. Our target price is based on 1.16x 2020F P/B, derived from the Gordon Growth model (ROE: 9.9%, COE: 8.5% (beta: 1.2x to 1.3x), Growth: 0.0%). Valuation is attractive with 2020F P/B at 1.0x and dividend yield at 5.1%.
- See OCBC Bank Share Price; OCBC Bank Target Price; OCBC Bank Analyst Reports; OCBC Bank Dividend History; OCBC Bank Announcements; OCBC Bank Latest News.
SHARE PRICE CATALYST
- Expansion in China’s Greater Bay Area.
- Non-interest income from wealth management, fund management and life insurance will with growing affluence in Asia.
Jonathan Koh CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-02-24
SGX Stock
Analyst Report
12.680
DOWN
12.800
