OCBC - CGS-CIMB Research 2020-05-09: Taking A Hit On Capital


OCBC - Taking A Hit On Capital

  • We think credit costs will taper q-o-q given the front-loaded 86bp in 1Q20.
  • OCBC (SGX:O39) has factored in foreseeable O&G concerns in 1Q20 mgmt. overlays (50bp GP). Credit deterioration expected to be broad based across economy.
  • OCBC's CET1 impacted by credit migration, but 12.5-13.5% target sustained by WHB.
  • Downgrade to HOLD with a Target Price of S$8.37 on weaker revenue trends ahead. Valuations currently at GFC trough. Expected S$0.53 DPS maintained.

Weak investment performance at Great Eastern Holdings dimmed 1Q20 net profit

  • Great Eastern Holdings (SGX:G07)’s weak investment performance amid market volatility was to be blamed for OCBC’s poor insurance income showing (-49% q-o-q, -43% y-o-y) due to MTM losses, and lower trading gains of S$18m (-94% q-o-q, -94% y-o-y) in 1Q20. Fee income (-2% q-o-q, +10% y-o-y) was slightly stronger than expected due to robust wealth mgmt. fees (+7% q-o-q, +22% y-o-y) on larger volumes. We think stronger wealth may offset persistent market uncertainty ahead.

We think credit costs will taper q-o-q given front-loaded 1Q20’s 86bp

  • OCBC expects to record 100-130bp in cumulative credit costs over FY20-21F, with the bulk of impairments to turn up after government-led moratoriums and regional relief measures taper off at end-20. OCBC had pre-emptively inputted management overlays in anticipation of rising NPLs in coming quarters. We believe that these credit costs have been front-loaded in 1Q20 (86bp) given management’s hefty overlay (50bp GP); this should push impairments lower q-o-q in FY20F.
  • The classification of an O&G trader as impaired was the main reason for elevated SPs of 36bp and the increase in NPA ratio to 1.5% in 1Q20. Management sees broad-based asset quality pressures beyond just the first-order impact. We expect 60/50bp credit costs in FY20/21F.

OCBC's 1Q20 NIM relatively steady at 1.76%, but expect compression ahead

  • 1Q20 NIM was resilient (-1bp q-o-q to 1.76%). OCBC guides for full-year FY20F margins to narrow ‘a touch below’ 1.7% as the Mar 20 Fed rate cuts filter through. The bank’s NIM as at end-1Q20 stood at c.1.74% — relatively durable given the fall in benchmark rates since Mar 20.
  • Larger CASA balances — up to 51% of total deposits in 1Q20 as the bank benefited from a flight to quality during the market turmoil — as well as a shift to shorter-tenure and fixed rate loans should offset some margin pressure going forward. We tweak our NIM forecasts slightly higher to 1.68%/1.67% in FY20F/21F (from 1.63%/1.59%),

Downgrade to HOLD, with a GGM-based Target Price of S$8.37

  • While further asset quality deterioration may affect OCBC’s 14.3% CET1 ratio (4Q19: 14.9%), we believe the bank’s progressive dividend policy (FY20F DPS: S$0.53) to be achievable given the eventual c.S$7.5bn in RWA savings (pro-forma 0.5% pt on CET1) from OCBC Wing Hang Bank’s (WHB) adoption of the IRB model towards end-FY20F.
  • We downgrade OCBC to HOLD on weaker revenue trends, although wealth income could be its saviour.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
  • Valuations have trended lower to 0.87x CY20F P/BV — its GFC trough.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-09
SGX Stock Analyst Report HOLD DOWNGRADE ADD 8.37 DOWN 9.040