OCBC - CGS-CIMB Research 2020-08-10: Projecting Higher Credit Costs Due To OSVs


OCBC - Projecting Higher Credit Costs Due To OSVs

  • OCBC (SGX:O39)'s FY20-21F credit costs could trend towards upper end of 100-130bp guidance on unexpected OSV writedown. That said, impairments should taper off q-o-q.
  • Subdued credit demand will result in flattish y-o-y loan growth (we expect c.3%), and drive NIMs lower towards 1.55-1.6% in FY20F (c.20bp y-o-y dip).
  • Reiterate HOLD. A rebound in MTM revaluations were OCBC’s strong point in 2Q20, but OCBC share price could remain range-bound on elevated credit costs.
  • We cut FY20F DPS to 31.8 Scts. Its 3.6% yield is the lowest amongst peers.

Credit costs likely to be on higher end of 100-130bp guidance

  • OCBC further wrote-down its OSV portfolio for those with limited charter visibility (e.g. less than 1 year) to c.3% of market value (including disposal costs) as well as to account for the weaker outlook ahead; this made up the bulk of the reported 66bp specific provisions in 2Q20. Excluding conglomerates and oil majors, OCBC’s exposure to OSVs (after SPs) stood at 0.2% of total loans at end-Jun 20.
  • Management guides that these writedowns could push FY20-21F credit costs towards the upper end of its 100-130bp guidance (c.S$2.7bn-3.5bn). On balance, OCBC has set aside S$1.4bn of impairments in 1H20 (c.40-50% of guidance) owing in part to front-loaded management overlays.

88% of exposure under moratorium are secured against collateral

  • Loans under moratorium amounted to S$27bn (c.10%) of gross loans; 88% of these are secured against collateral. To date, c.6-7% (S$6.5-7.5bn) of loans in Singapore were under moratorium, while c.70% of gross loans in Malaysia (S$13.7bn) were under forbearance given the automatic opt-in mechanism here. Over 50% of the latter were housing loans with an average LTV of c.56%.
  • Notably, the government-led moratorium in Malaysia ends in Sep 20 – we think that repayment trends coming off the scheme will be a key guiding point in realistically gauging credit risk migration across the bank’s whole portfolio, and the reliability and plausibility of Singapore banks’ credit cost estimates.

Expect flattish y-o-y loan growth; FY20F NIMs to slip to 1.55-1.60%

  • NIMs retraced 16bp q-o-q to 1.6% in 2Q20 (1Q20: 1.76%) as assets re-priced downwards amid the steep decline in benchmark rates. We expect the compression to moderate in 2H20 as costlier funding runs off.
  • Management guides for FY20F NIMs to slip c.20bp y-o-y to 1.55-1.60% (FY19: 1.77%). Subdued credit demand amid uncertain macroeconomic conditions will contribute to this; OCBC sees loan growth picking up only in 4Q20.
  • We revise our loan growth expectations down to c.3% in FY20F (FY19: 2.7%).

Reiterate HOLD on OCBC with higher GGM-based Target Price of S$9.19 from higher risk free rate

  • Our FY20F earnings factor in higher credit costs of 78bp (from 65bp previously) and 1.57% (20bp y-o-y compression), and lower FY20F DPS of 31.8Scts in line with MAS’s call for banks to cap dividends at 60% of FY19’s. That said, our Target Price is raised as we lower our sectoral risk-free rate.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
  • Upside/downside risks: swift economic recovery as borders reopen/second wave of COVID-19 infections in the region.

Reports on Singapore Banks & Valuations

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.370 SAME 8.370