OCBC - RHB Invest 2020-05-08: Highest CET1 Capital Adequacy Ratio A Boon Amidst Profit Decline


OCBC - Highest CET1 Capital Adequacy Ratio A Boon Amidst Profit Decline

  • We cut our sustainable ROE assumption to 8.3% from 9.5%, vs 1Q20’s 6%, as we raised provisions in line with OCBC (SGX:O39)’s guidance.
  • OCBC's 1Q20 net profit of SGD698m was slightly below, accounting for 20% and 17% of our pre-results and consensus’ 2020 forecasts respectively.
  • Keep NEUTRAL, with new GGM-derived Target Price of SGD8.70, from SGD9.00, 2% downside offset by c.4% yield, based on 0.81x 2020F P/NBV. Given its higher-than-peers CET1 CAR, we prefer OCBC over peers.

OCBC's 1Q20 net profit fell 43% y-o-y, and we cut our FY20-21 earnings forecasts.

  • The earnings collapse is due to a SGD365m y-o-y surge in non-impaired assets’ allowances. Income from insurance also fell SGD119m y-o-y. We cut FY20-21F net profit by 12-13%, due to higher provisions.

NIM to narrow in subsequent quarters.

  • OCBC's 1Q20 NIM of 1.76% was down 1bp q-o-q, with Mar 2020 NIM at 1.74%. While management will focus on asset composition and CASA deposits, they see full effects of rate cuts. Management guided FY20 NIM to be lower than 1.70%, and we forecast 1.67%, vs FY19’s 1.77%.

Wealth management fees remain robust.

  • Bank of Singapore’s AUM was down 4% y-o-y to USD104bn, as negative market actions offset positive net new money. 1Q20 wealth management fees rose 32% y-o-y to SGD291m. Overall net fees and commissions rose 10% y-o-y to SGD546m.

Guided FY20-21 cumulative credit cost of 110-130bps.

  • 1Q20 total credit cost was 86bps, of which 36bps was specific allowances. The balance 50bps was for general provisions buffer, including macro-economic variable adjustments.
  • OCBC guided FY20-21 cumulative credit costs of 110- 130bps, close to that during the SARS period, on expectation of the NPL ratio hitting up to 2.5-3.5%. We forecast FY20 total credit cost of 71bps.

Positive on higher-than-peers CET1 CAR (capital adequacy ratio).

OCBC's FY20F dividend yield of c.4%.

  • We forecast FY20 dividend of SGD0.36/share (based on 50% payout ratio), vs FY19’s SGD0.53. Management indicated its intention is to declare dividends at 1H20 results, but the final decision will depend on developments by that time. See OCBC Dividend History.

We have a target 2020F P/NBV of 0.81x

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-08
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 8.70 DOWN 9.000