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

OVERSEA-CHINESE BANKING CORP (SGX:O39)

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.

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.

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.

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%.

We upgrade OCBC to ADD, underscored by clearer navigation of asset quality indicators. Our GGM-based Target Price rises to S$10.13 as we cut FY21F credit costs, adjust NIMs and roll-forward to FY21F.
See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
Resumption of OCBC's dividends to levels prior to Monetary Authority of Singapore's (MAS) dividend cap is a key re-rating catalyst; we expect dividend of S$0.53 for OCBC in FY21F.
Downside risk: prolonged recession, hindering regional repayment prospects.

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