OCBC 2Q20 Results - CGS-CIMB Research 2020-08-07: Higher Credit Costs

OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC 2Q20 Results - Higher Credit Costs

Higher-than-expected credit cost of 97bp resulted in OCBC missing expectations in 2Q20. Net profit of S$730m was below our S$847m estimate.
Guidance: credit cost similar to peers at 100-130bp for 2020-21F, NPL of 2.5- 3.5% (2Q20: 1.6%), FY20F NIM of mid-to-high 1.5% and flat y-o-y loan growth.
OCBC's interim DPS was 15.9 Scts in 1H20 (1H19: 25 Scts).
OCBC's share price could be weaker than peers’ due to the results miss.

OCBC (SGX:O39)’s 2Q20 net profit of S$730m (+5% q-o-q, -40% y-o-y) was 14%/24% below our/consensus estimated S$847m/S$958m. 1H20 net profit formed 38%/40% of our/consensus forecasts.
OCBC declared an interim dividend of 15.9 Scts in 1H20 (1H19: 25 Scts), with an option for scrip. This represents half of the maximum S$31.8 Scts DPS that may be paid out in FY20F under the Monetary Authority of Singapore’s (MAS) guideline for banks to cap dividends at 60% of FY19’s DPS. See OCBC Dividend History.
The lower-than-expected net profit came mainly from heftier impairments of S$750m (vs. our expected S$450m). Reported credit cost was 97bp in 2Q20 (1Q20: 86bp). Specific provisions (SPs) rose to 66bp (1Q20: 36bp); 31bp were general provisions (GPs) (1Q20: 50bp). Most of the SPs were due to a write-down of offshore support vessels (OSVs) in view of the poor outlook for the sector.

OCBC's 2Q20 NIM fell 16bp q-o-q to 1.60% (1Q20: 1.76%), in line with our expectations; NII dipped 9% q-o-q and 7% y-o-y. Trading income rebounded strongly to S$325m (1Q20: S$18m), offsetting fee income weakness (-19% q-o-q, -16% y-o-y).
Wealth income was slightly softer q-o-q at S$264m in 2Q20 (-9% q-o-q, +1% y-o-y) while card income remained subdued. PPOP of S$1.5bn (+10% q-o-q, +4% y-o-y) was 12% ahead of our estimate.

Credit cost guidance was maintained at 100-130bp over FY20-21F. OCBC's CEO also guided for NPL ratio of 2.5-3.5%, full-year NIM of mid-to-high 1.5% range and flat loan growth.

On non-interest income, wealth income of S$264m was slightly weaker than 1Q20’s S$291m. AUM under Bank of Singapore rose to S$113bn from S$104bn in 1Q20.
2Q20 LDR was stable at 85.1% (FY19: 86.5%) as deposits and loans dipped c.1%.
Insurance income rose 80% q-o-q to S$282m on the back of stronger contributions from Great Eastern Holdings (SGX:G07). Great Eastern Holdings recorded weaker q-o-q total weighted new sales and new business embedded value but this was more than offset by a rise in profit from shareholders’ funds to S$85.3m in 2Q20 (1Q20: -S$41.9m) on the back of higher MTM gains. See Great Eastern Holdings Announcements.
Opex was flattish - CTI improved to 42.2% in 2Q20 (1Q20: 44.5%).
See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
See also DBS & UOB 2Q20 Results - CGS-CIMB Research 2020-08-06: Credit Cost Not Alarming, NIM Bottoming.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-07

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