OVERSEA-CHINESE BANKING CORP (SGX:O39)
Oversea-Chinese Banking Corp (OCBC) - 2Q20 Shoring Up Provisions To Address Heightened Uncertainties
- OCBC set aside hefty provisions of S$750m or 111bp in 2Q20, of which S$350m or 52bp was for legacy Oil & Gas NPLs. Excluding national oil companies and Singapore-based conglomerates, OCBC’s exposure to the Oil & Gas sector was reduced to less than 0.2% of total loans. CASA ratio improved 8.8ppt y-o-y to 56.7%.
- Management maintained guidance for credit costs at 100-130bp cumulatively over 2020 and 2021.
- Maintain BUY due to attractive 2020 P/B of 0.8x. Target: S$10.82.
OCBC's 2Q20 Results
- OCBC (SGX:O39) reported net profit of S$730m for 2Q20, down 40% y-o-y but up 5% q-o-q. The results were below our expectations of S$935m due to higher specific provisions.
Strengthened deposit franchise.
- OCBC registered strong deposit growth of 4.4% y-o-y. Low-cost current accounts and savings accounts grew 27% and 18% y-o-y respectively. Conversely, high-cost fixed deposits contracted 18% y-o-y. Thus, CASA ratio improved 8.8ppt y-o-y to 56.7%. Loan/deposit ratio narrowed by 2.2ppt y-o-y to 85.4%.
- Loan growth was muted at 2.0% y-o-y and 1.2% h-o-h in 1H20, driven by Greater China and other Asia Pacific regions. Loans for the Building & Construction segment grew 16% y-o-y.
NIM more resilient compared to peers.
- NIM compression was milder compared to its peers at 19bp y-o-y and 16bp q-o-q to 1.60% in 2Q20. OCBC experienced severe compression in asset yields caused by aggressive cuts in interest rates by central banks across the region. However, cost of deposits was lowered by 0.51ppt y-o-y to 1.17% in 1H20, which partially cushioned the steep compression in asset yield.
Wealth management affected as high net worth clients turned risk averse.
- Fee income dropped 16% y-o-y to S$440m due to slowdown in economic activities and reduced branch traffic with tightened safe distancing measures. Wealth management fees declined 22% y-o-y. AUM at private banking subsidiary Bank of Singapore grew 1% y-o-y and 8% q-o-q to US$113b. Loans, trade and guarantee fees declined 27% y-o-y.
MTM gains boosted contributions from insurance and trading income.
- Contribution from life insurance business increased 50% y-o-y to S$282m. Great Eastern Holdings (SGX:G07)'s investment portfolios registered mark-to-market (MTM) gains. Net trading income increased 68% y-o-y to S$325m boosted by increase in customer-driven treasury activities and gains from investments for Great Eastern Holdings's shareholders' fund.
Shores up provisions to address heightened uncertainties.
- OCBC has hiked total provisions substantially by 14% q-o-q to S$750m (credit costs: 111bp). General provisions was significant at S$232m and included management overlay of S$300m, in excess of what is required by its macro-economic variable (MEV) model. Loan-loss coverage improved by 10.6ppt q-o-q to 100.8%.
Addressing remnants of O&G exposure.
- Management decided to conservatively write down the carrying value of existing offshore support vessels NPLs by S$350m (specific provisions) due to their pessimistic view on outlook for oil exploration activities. Excluding national oil companies and Singapore-based conglomerates, OCBC’s exposure to the O&G sector has been reduced to less than 0.2% of total loans.
- NPL formation has moderated from S$623m in 1Q20 to S$496m in 2Q20. NPL ratio edged slightly higher by 7bp q-o-q to 1.58%, moderated by recoveries, upgrades and write-offs.
Complying with MAS’ guideline.
- OCBC declared interim dividend of 15.9 S cents. The scrip dividend scheme is applicable to the interim dividend and issue price for new shares is set at a 10% discount. See OCBC Dividend History.
STOCK IMPACT
Cautious outlook.
Maintained guidance for credit costs.
- Management expects loan growth to be muted in 2020. It guided flat loan growth and NIM at mid-to-high 1.5% (1.55% to 1.59%). Management guided NPL ratio to deteriorate to 2.5-3.5%, compared to current 1.6%. Credit costs are expected to be 100-130bp cumulatively over the next two years (2020-2021), incorporating the impact from the withdrawal of government sponsored relief programmes.
- Management intends to further reduce expenses by capping discretionary spending, adjusting variable compensation, rationalising real estate costs and achieving efficiency gains through investment in technology.
Moratorium relief accounted for 10% of total loans.
- OCBC has moratorium relief of S$27b across the region (individuals: 50%, corporate & commercial (mid market): 35% and SMEs: 15%), of which 88% are secured by collaterals. Malaysia accounted for S$13.7b or about half of the moratorium relief (secured: 86%). The severity of NPL formation is dependent on an orderly withdrawal from moratorium relief.
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 estimated reduction in RWA of S$7.5b, which would further improve CET-1 CAR by 0.6ppt.
EARNINGS REVISION/RISK
- We cut our net profit forecasts for 2020 and 2021 by 9% and 6% respectively due to higher provisions in 2Q20 and NIM compression.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$10.82 is based on 0.98x 2021F P/B, derived from the Gordon Growth model (ROE: 7.6%, COE: 7.75% (beta: 1.15x), Growth: 1.5%).
- Valuation is attractive with 2020 P/B at 0.8x.
- 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.
- anagement, fund management and life insurance will ith growing affluence in Asia.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-08-11
SGX Stock
Analyst Report
10.82
DOWN
11.220
