OCBC - CGS-CIMB Research 2020-11-07: Capital Build-Up; Upgrade To ADD


OCBC - Capital Build-Up; Upgrade To ADD

  • Repayment trends post-moratorium in Malaysia are promising. OCBC guides for credit costs/peak NPLs to be on the lower end of 100-130bp/2.5-3.5%. We expect more NIM pressure in 4Q20F, but this should stabilise in FY21F.
  • Upgrade OCBC to ADD with higher Target Price of S$10.13.
  • Asset quality visibility and capital above targeted 12.5-13.5% make a case for a resumption of dividends.

Positive repayment trends post-moratorium in Malaysia

  • OCBC (SGX:O39)'s 3Q20 net profit was driven by lower-than-expected credit costs as loan moratoriums expire in Malaysia. Group loans under moratorium shrank to c.5% (c.$S13.6bn) at end- Oct (end-Jul: c.10%/S$26.7bn). See result note: DBS & OCBC - CGS-CIMB Research 2020-11-05: Earnings Beat From Trading & Impairments.
  • Repayment trends were encouraging, with over 90% of these loans resuming timely and full repayments. So far, there have been two repayment installments for the consumer and SME books, and one for corporate loans. Risks of non-payment are present given the limited track record so far, but early engagement with customers will provide it warning signs.
  • OCBC projects the exit of its loans under moratorium in Singapore (S$8.8bn) and HK (S$1.5bn) to be relatively smooth given active government support (grants, jobs support scheme), but it would keep watch on those in Indonesia (S$1.6bn); c.93% of this portfolio is secured, mostly by real estate.

OCBC's NPLs likely to peak at lower end of 2.5-3.5% range

  • In our view, visibility of repayment trends will likely result in credit costs trending on the lower end of OCBC’s guided 100-130bp over FY20-21F, or more granularly, c.78bp of impairments in FY20F tapering off to c.25bp in FY21F.
  • Assuming no write-offs, NPL ratio could rise towards 2.5-3.5% (1.6% currently). Flows into this ratio will likely stem from the exit of the various relief programmes vs. new cases of business failure. However, current repayment trajectory and write-offs should keep this ratio at the lower end of the range.

OCBC's NIMs should stabilise going into FY21F

  • We expect NIMs to remain pressured into FY21F as more loan repricing filters through. OCBC’s strategy is to build on longer-tenured assets and shore up its CASA base to stem further compression; we expect c.1.47% in FY21F (FY20F: 1.6%).
  • OCBC expects low-to-mid single-digit loan growth in FY21F as key markets continue to be affected by closed borders. Modest growth and contained credit migration (via NPL formation trajectory) should see RWA growing c.5% in FY21F, keeping CET1 ratio over c.14%. RWA savings of c.S$7bn from OCBC Wing Hang’s adoption of the IRB approach (likely 1H21F) could push this closer to c.15%, above the group’s efficient range of 12.5-13.5%.

Upgrade OCBC to ADD; capital build-up makes a case for dividend resumption

CGS-CIMB Research Reports on Singapore Banks 3Q20 Results

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-07
SGX Stock Analyst Report ADD UPGRADE HOLD 10.13 UP 9.380