OCBC Bank - CGS-CIMB Research 2020-05-08: Weighed Down By Insurance & Trading


OCBC Bank - Weighed Down By Insurance & Trading

  • OCBC forecasts credit costs of 100-130bp over 2 years, higher than during GFC (58/52bp in FY08/09) and lower than in AFC (147/262bp in FY98/99).
  • Net profit of S$698m missed our S$859m and Bloomberg’s c.S$1bn, mainly due to MTM losses from Great Eastern (SGX:G07), bringing net trading income to only S$18m.
  • Reported credit cost was 86bp (DBS: 99bp, UOB: 36bp), comprising 36bp of SP and 50bp of GP. We project near-term share price weakness.

Rising credit costs

  • OCBC (SGX:O39)'s 1Q20 impairments of S$657m translated into credit costs of 86bp, above the 71bp we expected. SPs were stable at 36bp (due to a downgraded Singapore oil trading account). GPs made up 50bp due to MEV adjustments (management overlay). NPAs rose 13% q-o-q to S$1.8bn. The NPL ratio inched up 7bp to 1.52% (4Q19: 1.45%).
  • OCBC guided for overall cumulative credit costs to be 100-130bp in the next two years. This is higher than in GFC, close to during SARS but lower than in AFC. Variance depends on effectiveness of the relief programmes and the duration of suspension of business activities regionally. The bank guides for NPL ratio to rise to 2.5-3.5% on near-term economic weakness.

OCBC's results highlight: MTM losses key culprit

  • OCBC's 1Q20 net profit of S$698m (-44% q-o-q, -43% y-o-y) was 19%/30% below our/consensus estimated S$859m/S$1.0bn. 1Q20 net profit formed 14%/17% of our/consensus forecasts. The miss was due to significantly lower q-o-q treasury income (-61% q-o-q, - 57% y-o-y) as trading income slid to S$18m (FY19 quarterly average: S$244m) due to unrealised MTM losses in Great Eastern Holdings’s investment portfolio. Investment gains of S$118m (FY19 quarterly average: S$43m) offset some of this.
  • NIM dipped 1bp to 1.76% (4Q19: 1.77%, FY19: 1.77%).
  • Wealth fees were better q-o-q (+17% q-o-q, +32% y-o-y) at S$291m but AUM under BOS dipped 11% q-o-q to S$104bn (4Q19: S$117bn).
  • 1Q20 LDR was better q-o-q at 85.1% (FY19: 86.5%) as deposits rose 4% vs. loan growth of 2% q-o-q.
  • Opex was well controlled, with CTI improving to 44.5% in 1Q20.
  • Insurance income fell 49% q-o-q and 42% y-o-y to S$157m on the back of weaker contributions from Great Eastern Holdings. Great Eastern Holdings recorded weaker q-o-q total weighted new sales (TWNS) of S$299m (-24% q-o-q, +21% y-o-y) and lower new business embedded value (NBEV) of S$126m (-35% q-o-q, +15% y-o-y). Profit from shareholders’ fund recorded a loss of S$41.9m in 1Q20 (4Q19: +S$54.6m) due to MTM losses in equities.
  • OCBC's 1Q20 CET-1: 14.3% (4Q19: 14.9%). 1Q20 ROE 6.0% (4Q19: 10.9%, FY19: 11.4%).

Loan book exposure

  • OCBC's loan book mix: corporate 49%, SME 11%, consumer 40%, Oil and gas: 5%, commodities: 6%, shipping sector (excluding OSVs): 2%, aviation: less than 1%.

Reiterate ADD and Target Price of S$9.04

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-08
SGX Stock Analyst Report ADD MAINTAIN ADD 9.040 SAME 9.040