OCBC Bank - RHB Invest 2020-03-17: Net Interest Margin To Narrow From Federal Fund Rate Cut


OCBC Bank - Net Interest Margin To Narrow From Federal Fund Rate Cut

  • Stay NEUTRAL with a new GGM-derived SGD9.60 Target Price from SGD11.20, 10% upside with c.6% yield, based on 0.89x 2020F P/NBV.
  • We lowered our sustainable ROE assumption to 10% from 10.7%, as we cut FY20F earnings on lower NIM and higher provision assumptions.
  • The 15 Mar cut in the federal fund rate (FFR) will subsequently exert downside on the SIBOR.
  • Travel restrictions globally – including the one announced by Malaysia yesterday following the recent pandemic declaration by the World Health Organisation – could raise provisioning requirements.

FFR cut on 15 Mar will lower the SIBOR going forward.

  • The US Federal Reserve cut the FFR twice in March (150bps in total) to the current upper bound of 0.25%. The 3-month SIBOR has fallen to the current 1.22% vs February’s 1.69% average. It is likely that the 3-month SIBOR will fall further.
  • We cut our FY20F NIM to 1.68% from 1.73% to factor in the two FFR cuts – recall that OCBC (SGX:O39) recorded NIM of c.1.66% in FY13 and FY14 when the FFR was close to zero.

We forecast an FY20 loan contraction.

  • Given the global travel restrictions and sharp fall in crude oil price, investments are likely to be scaled back sharply. Malaysia accounts for 10.8% of OCBC’s FY19 global loans, and we could see soft loans from there.
  • We assume an overall loan contraction of 2% in FY20 for the bank.

Provisions to move up.

  • We believe asset quality will deteriorate as economic growth stalls. As a result, we raise our FY20F NPL ratio to 1.9% and increase our provisions for this period by 10% to SGD1.08bn, or 42bps credit cost.

We cut FY20F net profit by 8% to SGD4.17bn.

  • Our pre-report FY20F net profit is amongst the lowest amongst Bloomberg compilations, but we are cutting further to factor in the recent developments. There is further downside to earnings forecasts if the COVID-19 pandemic worsens globally.

OCBC’s FY20F yield of c.6% may be high, but could come in lower.

  • Based on our 53 cents/share dividend for FY20F, OCBC’s yield is c.6%, sharply higher than the 10-year Singapore Government Bond yield of 1.48%. However, there is a risk that a prolonged economic disruption could lead to dividends coming in lower than our expectations. Our Target Price is based on 2020F P/NBV of 0.89x, which is lower than the 5-year average of 1.15x.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
  • We believe OCBC could see short-term price downsides due to the headwinds mentioned above.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-17
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 9.60 DOWN 11.200