Oversea-Chinese Banking Corporation (OCBC) - RHB Invest 2020-02-24: 4Q19 Earnings Strength From Trading Income


Oversea-Chinese Banking Corporation (OCBC) - 4Q19 Earnings Strength From Trading Income

  • OCBC Bank (SGX:O39)'s FY19 net profit of SGD4.87bn was in line with expectations, accounting for 105% and 102% of our and consensus’ forecasts respectively.
  • We lowered our sustainable ROE assumption to 10.7% (from 11.7%), in line with 4Q19’s 10.9%, due to a softer economic environment after the COVID-19 outbreak.
  • Keep NEUTRAL, with a lower GGM-derived Target Price of SGD11.20, from SGD11.50, 1.8% upside plus c.5% yield, based on 1.03x 2020F P/BV.

4Q19 net profit jumped 34% y-o-y, but we expect weaker 2020 earnings.

  • The big positive in 4Q19 came from a net trading income of SGD316m, versus SGD9.0m in 4Q18. 4Q19 net interest income also rose 6% y-o-y, with a 5bps NIM widening, a contributing factor.
  • Management estimates the COVID-19 to reduce FY20 revenue by 2% compared with a scenario of no COVID-19. We cut our FY20F net profit by 5% to SGD4,507bn.

NIM narrowing seen.

  • 4Q19 NIM of 1.77% was flat sequentially. Management guided for a lower NIM in FY20 than FY19’s 1.77% but wider than FY18’s 1.70%. We forecast a FY20 NIM of 1.73%.

Soft loan growth for FY20.

  • 4Q19 loans expanded 3% y-o-y, and were up 1% q-o-q. Worthy of mention is the 1% q-o-q drop in housing mortgages. We forecast FY20 loan growth of 2% as businesses slow their loan demand with a slowing economy.

FY19 wealth management income accounted for a 31% share of total income.

  • FY19 wealth management income expanded 20% y-o-y. Bank of Singapore’ AUM was USD117bn at Dec 2019, up 15% y-o-y. We remain bullish on wealth management’s growing contribution to OCBC Bank’s revenue.

Guidance on FY20 credit cost.

Final dividend of SGD0.28/share

  • The scrip dividend scheme will not apply. FY19 total dividend is SGD0.53, vs FY18’s SGD0.43. Management said that the SGD0.28 semi-annual dividend can be taken as the norm going forward. We forecast a FY20 dividend yield of 5%.
  • We have a target 2020F P/BV of 1.03x (vs 7-year average of 1.22x). Our sustainable ROE assumption of 10.7% compares with FY19’s 11.4% and 4Q19’s 10.9%.
  • In addition to the macro headwinds, OCBC Bank’s high CAR ratio also limits future ROE upside.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-02-24
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 11.20 DOWN 11.500