OVERSEA-CHINESE BANKING CORP (SGX:O39)
OCBC Bank 2Q20 Results Preview - Sequential Bounce From MTM Gains & Moderation In Credit Costs
- We forecast OCBC (SGX:O39)'s net profit of S$935m for 2Q20, down 23.6% y-o-y but up 33.9% q-o-q. The strong sequential rebound was due to:
- MTM gains from Great Eastern Holdings (SGX:G07), which are reflected in increased contributions from insurance and higher net trading income, and
- moderation in credit costs by 32bp q-o-q to 67bp (big blow from Hin Leong in 1Q20).
- Progressive reopening will provide momentum for an economic recovery.
- We see value in OCBC with 2020F P/B at 0.9x and dividend yield at 5.6%.
- Maintain BUY. Target price: S$11.58.
2Q20 Results Preview for OCBC
Muted loan growth.
- We expect muted loan growth of 2.9% y-o-y and 0.5% q-o-q in 2Q20, affected by broad slowdown in economic activities. OCBC has disbursed S$1b in government-assisted SME loans by Jun 20. However, bookings for residential mortgages have slowed and competition has intensified, resulting in some customers repaying after securing refinancing.
Drastic NIM compression.
- We expect NIM to have collapsed by 11bp y-o-y and 8bp q-o-q to 1.68% in 2Q20. 3-month SIBOR and SOR have fallen 44bp and 72bp respectively to 0.56% and 0.20% in 2Q20. 3-month LIBOR has fallen by a massive 115bp to 0.30% (LIBOR interbank rates were elevated due to stressed funding market conditions in 1Q20).
- US dollar-denominated loans accounted for 24.6% of total loans. The synchronised fall of these benchmark interest rates has caused significant compression of loan yields.
Slower growth in fees.
- We expect contributions from Wealth Management to have declined by 14% y-o-y due to the Circuit Breaker period (7 April to 1 June), which resulted in fewer customers visiting its branches and a decline in sales of investment products (OCBC temporarily closed 22 of its Singapore branches from 9 April to 4 May but 24 branches remained open).
- We expect a 14% y-o-y decline in contributions from cards, hampered by curbs on overseas travel. We expect OCBC to achieve mid single-digit decline in fees of 6% y-o-y in 2Q20.
Lower contribution from insurance business.
- The equity market bottomed in the third week of March. FSSTI and KLCI rebounded by 4.4% and 11.1% in 2Q20. Great Eastern's investment portfolios are expected to register mark-to-market (MTM) gains. We expect contribution from insurance business to be higher at S$220m, up 17% y-o-y.
- We also expect net trading income to be higher at S$140m (2Q19: S$193m, 1Q20: S$75m), boosted by gains from investments for Great Eastern's shareholders' fund.
Moderation in specific provisions.
- We expect general provisions of S$120m, caused by recalibration of macroeconomic variables due to COVID-19 induced recession in 2020 (the Ministry of Trade & Industry has lowered GDP forecast from contraction of 1-4% to contraction of 4-7%).
We expect NPL ratio to deteriorate 0.2ppt q-o-q to 1.7%.
- We expect NPL formation of S$650m and specific provisions of S$325m. Overall, we expect credit costs of 67bp in 2Q20 (2Q19: 17bp, 1Q20: 99bp).
Sequential recovery in earnings.
- We forecast net profit of S$935m for 2Q20, down 23.6% y-o-y but up 33.9% q-o-q. The strong sequential rebound is generated by:
- MTM gains from Great Eastern, which reflects increased contributions from insurance and higher net trading income,
- moderation in credit costs by 32bp q-o-q to 67bp (suffered big blow from Hin Leong in 1Q20).
Room to reduce cost of deposits in 3Q20.
- OCBC has halved the salary credit bonus interest rates for its 360 savings accounts from 1.2% to 0.6% for balances of up to S$35,000 and 2.4% to 1.2% for balances of between S$35,000 to S$70,000 with effect from 1 Jul 20. The bank has also stopped offering credit card spend bonus interest (previously at 0.2% for balances of up to S$35,000 and 0.4% to 1.2% for balances of between S$35,000 to S$70,000).
Two years of elevated credit costs.
- Management previously guided that NPL ratio will deteriorate to 2.5-3.5%, compared to 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).
Capacity to generate stable dividends.
- Management will strive to maintain DPS at current 56 S cents per year, subject to review every six months. See OCBC Dividend History.
- OCBC has robust CET-1 CAR of 14.3%, which is the highest among local banks and significantly above its comfort zone of 12.5-13.5%.
- Implementation of internal ratings-based approach (IRBA) for calculating risk-weighted assets at OCBC Wing Hang is scheduled to complete by late-20 or early-21, which will provide a further boost to its CET-1 CAR.
Valuation & Recommendation
- We increase our OCBC's net profit forecast for 2020 marginally by 1.2% due to mark-to-market gains at Great Eastern and slight easing of credit costs in 2Q20.
- We expect interim dividend for 1H20 to be reduced by 7.1% from 28 S cents to 26 S cents. See OCBC Dividend History. We expect full-year DPS for 2020 to be 52 S cents.
- We assume that OCBC will turn on its scrip dividend schemes for two years in 2020 and 2021 with issue price for new shares set at 10% discount to yesterday’s closing price, which is S$9.24. We assumed acceptance for scrip dividend at 75%.
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
- OCBC's valuation is attractive with 2020 P/B at 0.9x and dividend yield at 5.6%. Maintain BUY. Target price: S$11.58.
- OCBC's share price catalyst
- Expansion in China’s Greater Bay Area.
- Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-07-08
SGX Stock
Analyst Report
11.58
DOWN
12.180
