OVERSEA-CHINESE BANKING CORP (SGX:O39)
Oversea-Chinese Banking Corp (OCBC) 1Q20 - Taking It On The Chin
- OCBC's 1Q20 earnings were affected by unrealised MTM losses totalling S$502m, which affected contributions from insurance and net trading income.
- Total provisions increased 163% y-o-y due to specific provisions for Hin Leong and a hike in general provisions to address risks from COVID-19 pandemic.
- Management guided credit costs of 100-130bp cumulatively over 2020 and 2021, in line with our expectations.
- Maintain BUY due to 2020F P/B of 0.8x and dividend yield of 6.3%. Target: S$9.78.
OCBC's 1Q20 Results
- OCBC (SGX:O39) reported net profit of S$698m, down 43% y-o-y (commercial banking: -28% y-o-y, insurance: -94% y-o-y). The results are slightly below our forecast of S$757m. See OCBC Announcements.
Net interest income increased 6% y-o-y.
- Loans expanded 5% y-o-y, driven primarily by Greater China (+8% y-o-y). Net interest margin (NIM) was flat y-o-y and q-o-q at 1.76%. OCBC benefitted from elevated LIBOR interbank rates caused by stressed funding market conditions. CASA ratio improved 4.2ppt y-o-y to 51%.
- OCBC also shifted to longer tenure loans to mitigate the impact from the low interest rate environment.
Strong growth from wealth management in January and February.
- Fees grew 10% y-o-y, driven by wealth management (+32% y-o-y) and brokerage & fund management (+27% y-o-y). AUM contracted 4% y-o-y to US$104m with positive net new money, offset by correction in financial markets.
Insurance affected by correction in equity market in March.
- Contributions from insurance dropped 43% y-o-y due to unrealised mark-to-market (MTM) losses of S$413m from its insurance operations, which were partially offset by the reduction in insurance contract liabilities of S$208m (triggered by lower government bond yields).
- Net trading income fell from S$285m last year to S$18m this year as growth in treasury-related customer flows were offset by unrealised MTM losses of S$89m for investments undertaken for Great Eastern (SGX:G07)'s shareholders' fund.
Deterioration in asset quality from exposure to oil & gas sector.
- NPL balance increased by 13% q-o-q while NPL ratio edged marginally higher by 7bp q-o-q to 1.52%.
- Exposure to oil trader Hin Leong of US$250m (S$360m) was recognised as NPL and provisions made in 1Q20.
- The exposure to another oil trader ZenRock is small and is supported by letter of credit, which has already been accepted.
Beefing up loan-loss coverage.
- Total provisions were S$657m (86bp), up 163% y-o-y. OCBC has set aside general provisions of S$382m, including forward-looking macro-economic variable (MEV) adjustments. Specific provisions were S$275m, mainly for oil trader Hin Leong. Loan-loss coverage improved significantly by 4ppt q-o-q to 90%.
- CET-1 CAR remains the highest among the three local banks at 14.3%.
Cautious outlook.
- The extent of economic fallout from COVID-19 pandemic is uncertain. Recovery is unlikely until 2021 at the earliest. Management expects loan growth to be muted in 2020.
Two years of elevated credit costs.
- Management guided that NPL ratio will deteriorate to 2.5-3.5%, compared with the current 1.5%. Credit costs are expected to be 100-130bp cumulatively over the next two years in 2020 and 2021 (higher than GFC, close to SARS but lower than AFC), which is in line with our expectations.
Sustainable dividend policy.
- OCBC intends to pay progressively higher dividends, in line with its long-term growth. However, management needs clarity on financial performance in 1H20 and economic outlook for the rest of the year before making a decision on interim dividend for 1H20. See OCBC Dividend History.
Supporting customers in overseas expansion.
- Loans to building & construction expanded to 25% of total loans (Mar 19: 21% of total loans) to support customers' expansion overseas through acquisitions of logistics properties and student accommodation (drawdown of committed loans). Loans to property developers declined in 1Q20.
- OCBC predominantly lends to large developers, who are able to cope with the short-term weakness in sales of residential properties.
Further improvement in capital adequacy from OCBC Wing Hang.
- Management expects implementation of internal ratings-based approach (IRBA) for calculating risk-weighted assets (RWA) at OCBC Wing Hang to be completed by 4Q20 or 1Q21, subject to approvals from regulators MAS and HKMA. Management estimates reduction in RWA of S$7.5b, which would further improve CET-1 CAR by 0.6ppt.
Maintain BUY.
- Our target price of S$9.78 is based on 0.92x 2020F P/B, derived from the Gordon Growth model (ROE: 7.4%, COE: 8.0% (beta: 1.2x), Growth: 0.0%).
- We have trimmed our OCBC earnings forecast for 2020 by 1.7% after factoring in business update for 1Q20.
- Valuation is attractive with 2020 P/B at 0.8x and dividend yield at 6.3%.
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
- Share price catalyst: Expansion in China’s Greater Bay Area; Non-interest income from wealth management, fund management and life insurance will em with growing affluence in Asia.
- Read also: Singapore Banks 1Q20 Round Up - UOB Kay Hian 2020-05-11: First Stage Of Credit Cycle Is Always The Hardest.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-05-11
SGX Stock
Analyst Report
9.780
SAME
9.780
