OCBC - DBS Research 2020-07-21: Great Eastern Holdings Investment Income A Likely Plus

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OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC - Great Eastern Holdings Investment Income A Likely Plus

• OCBC (SGX:O39)'s 2Q20 NIM expected to see sharp decline of ~16bps q-o-q as loans reprice on lower benchmark rates.
• Recovery in mark-to-market valuations should bolster Great Eastern Holdings investment income from 1Q20’s trough.
• Provisions likely to weigh on earnings through 2Q20.

Maintain HOLD with higher Target Price of S$9.30.

• We maintain our HOLD call, with a higher Target Price of S$9.30, as we believe there are limited catalysts for the stock currently amid the zero-rate environment, and uncertain economic recovery path.
• In the upcoming 2Q20 results, we believe a q-o-q NIM decline of ~16bps will surprise on the downside, with further downside in NIM expected as OCBC is expected to see repricing of its mortgage book in Singapore further in 2H20. The recovery in mark-to-market valuations should bolster Great Eastern Holdings (SGX:G07)’s investment income from 1Q20’s trough, amidst mixed showing from lower fee income and higher trading income.
• We also believe that absolute DPS could be cut to 46 Scts in FY20F (FY19: 53 Scts) due to the expected decline in corresponding earnings. See OCBC Dividend History.

Where we differ:

• We remain cautious over OCBC’s SME books across the region, especially in emerging markets, in the face of a regional economic slowdown and recession in Singapore, arising from COVID-19.

Valuation:

• Our revised Target Price of $9.30 is based on the Gordon Growth Model (8% ROE, 3% growth, 9% cost of equity). This is equivalent to c.0.8x FY21F P/BV, which is 2S.D. below its average 10-year forward P/BV multiple.
• Our previous Target Price was pegged to OCBC’s trough valuation of 0.7x P/BV.
• See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

Potential Catalysts:

• Sustained business momentum. We believe sustained business momentum and broader recovery in macroeconomic sentiments would catalyse OCBC Share Price.

Key Risks to Our View:

• Deteriorating asset quality. A larger-than-expected NPL arising from generic sectors and/or commodity-related exposure, as well as a worse-than-expected COVID-19 pandemic situation globally could unwind expectations of credit cost and NPL declines, could pose risks to earnings.
• Further, unemployment arising from recession could pose risks to mortgages and unsecured consumer lending, among others.
• OCBC to report 2Q20 results on 7 Aug. See 1H2020 Earnings Schedule for STI Constituents.

Read also : Singapore Banks - Sharp Decline In NIMs In 2Q20

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-07-21

SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.30 UP 7.900