OVERSEA-CHINESE BANKING CORP (SGX:O39)
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.
- FY19 credit cost was 25bps, of which two-thirds was for the Oil & Gas sector. OCBC Bank believes provisions for Oil & Gas should taper off in FY20, and help to offset the rise in provisions for the COVID-19 related sectors such as retail, hospitality, etc. 6% of OCBC Bank’s loan portfolio are to the sectors with first order impact to COVID-19 eg hotels and retail, and 4% for second order eg manufacturing relating to China.
- See OCBC Bank Share Price; OCBC Bank Target Price; OCBC Bank Analyst Reports; OCBC Bank Dividend History; OCBC Bank Announcements; OCBC Bank Latest News.
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
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https://www.rhbinvest.com.sg/
2020-02-24
SGX Stock
Analyst Report
11.20
DOWN
11.500
