OCBC - CGS-CIMB Research 2020-11-27: Looking Forward To More Normal Scenarios


OCBC - Looking Forward To More Normal Scenarios

  • We think that market has started looking past asset quality risks and NIM negativity, towards a more normalised scenario as lockdown measures ease.
  • Reiterate ADD on OCBC with a higher target price of S$12.52 as incremental newsflow from COVID-19 vaccine developments boost forward earnings visibility.
  • We peg our OCBC Target Price to a sustainable forward ROE of 10%, factoring in a recovery towards pre-pandemic valuations of c.1.1x P/BV over FY17-19.

Encouraging repayment trends moderate asset quality risks

  • Post-3Q20 earnings, we sense OCBC (SGX:O39) turning more optimistic in its asset quality outlook following successful repayment instalments as loan moratoriums in Malaysia expired in Sep 20. Consequently, OCBC’s proportion of loans under moratorium fell to c.5% (c.S$13.6bn) of group loans; the bulk of these comprised loans in Singapore (c.S$8.8bn) while the rest were split between Malaysia, Indonesia, and Hong Kong and Macau.
  • Notably, OCBC set aside c.S$1.6bn in provisioning expenses in 9M20 or c.45-57% of its guided c.100-130bp (S$2.8bn-S$3.5bn) credit costs for FY20-21F.
  • Although OCBC's management cautions for an uptick in NPLs towards the lower-end of 2.5-3.5% (assuming no write-offs, from 1.65% currently) as government support measures roll amid the expiry of Singapore moratorium by end-20, we think the impact on earnings will be contained given the expensed front-loaded provisioning and strong collaterisation (moratorium portfolio 93% secured). NPA coverage ratio at end-3Q20 stood at 109%.

Wealth, insurance and trading income to offset flattish NIMs

  • OCBC’s non-interest income streams will be instrumental in supporting revenue going forward given the unlikely prospect of NIMs rising in the medium term. Aside from broad-based recovery of fee income (such as credit card fees and brokerage) as domestic social distancing measures ease, we expect insurance, wealth and treasury income to continue rising towards new normal levels over FY21-23F, as supported by sustained customer flows amid the low interest rate environment (yield-hunting).
  • Treasury and insurance income will in part be influenced by markets, but our expectations of a quicker normalisation of economic activity as vaccinations begin could spur more risk-on momentum.
  • That said, stronger transaction volumes should be accompanied by higher opex (mid-to-high single digit growth) in FY21F as variable costs. We think CTI ratio could reach 45-46% (from 43% in FY20F).

Reiterate ADD on OCBC with higher GGM-based target price on vaccine optimism

  • We expect reduced provisioning expenses and rising non-II to support earnings recovery towards double-digit ROEs, as seen during the pre-pandemic period in FY17-19.
  • We believe that incremental newsflow from COVID-19 vaccine developments are confidence boosters for equities, where sectors (such as financials) more geared to a broad economic recovery will be key beneficiaries.
  • Reiterate ADD on OCBC with higher GGM-based target price of S$12.52, pegged to a 10% ROE, implying c.1.1x FY21F P/BV (avg. valuation over FY17-19) as market prices in vaccine optimism.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
  • Downside risks are sustained border closures.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-27
SGX Stock Analyst Report ADD MAINTAIN ADD 12.52 UP 10.130