OCBC - DBS Research 2020-11-05: Stabilised Outlook For Now


OCBC - Stabilised Outlook For Now

  • OCBC's 3Q20 results ahead of expectations.
  • Guiding for lower range of credit costs through FY21F.
  • Continue to keep watch on loans exiting moratoriums.

OCBC's 3Q20 net profit improved from 2Q, ahead of expectations.

  • OCBC (SGX:O39) reported revenues of S$2,539m (-4% y-o-y/ -3% q-o-q) with net profit of S$1,028m (-12% y-o-y, +41% q-o-q), ahead of expectations. This was mainly driven by lower provisions of S$350m (+96% y-o-y, -53% q-o-q). Operating costs were tightened at -3% y-o-y/-1% q-o-q, resulting in lower cost-to-income ratio of 43.2% (2Q20: 42.2%). Capital ratios remain strong with CET1 and total CAR at 14.4%/17/1% respectively.
  • Currently, management is guiding for mid-to mid-high single-digit increase in expenses for 2021.

Net interest income slides on margin pressures.

  • Net interest income of S$1,421 declined 11% y-o-y/4% q-o-q, as net interest margin (NIM) declined 6bps q-o-q to 1.54% on lower interest rates and flat loan growth (+2% y-o-y/ flat q-o-q).
  • Looking into 2021, management is guiding for low mid-single-digit to mid-single-digit loan growth. Bright spots in the longer term include sustainability & renewable loans in which OCBC has built expertise in the last five years (current outstanding loan book of S$13bn, aiming for S$25bn by 2025), which should buffer ongoing decline in margins.

Mixed non-interest income.

  • Non-interest income of S$1,118m was mixed (+6% y-o-y/-2% q-o-q). Strong rebound in net fee income of S$501m (-9%y-o-y/+14%q-o-q) was driven by strong wealth management fees of S$252m, above pre-COVID levels (+4%y-o-y/+24%q-o-q). This was offset by lower trading income led by decline in treasury income and lower mark-to-market gains in GEH’s investment portfolio.
  • Broadly, OCBC expects broad-based fee income growth to continue into 2021, as wealth management continues to be a key driver for non-interest income.

Smaller provisions this quarter.

  • NPL was flat during 3Q20, at 1.6% (3Q19: 1.6%). During the quarter, OCBC saw lower new NPA formation of S$270m (2Q20: S$496m) as asset quality largely stabilised. Total allowances were at S$350m, 47bps (2Q20: S$750m, 97bps), including general allowances (stage 1+2) of S$202m, 27bps (2Q20: S$232m, 31bps) which included S$150m of management overlay and special allowances (stage3) of S$148m, 20bps (2Q20: S$518m, 66bps).
  • Total credit costs for 9M20 stood at S$1,758, 77bps (1H20: 91bps), which include S$816m of general allowances. As a result, NPA coverage improved to 109% (2Q20: 101%).

Takeaways from OCBC's analyst briefing

Credit costs and NPL ratio through FY21F are likely to be at the lower end of original guidance.

  • OCBC's management is maintaining its previous guidance of 100-130bps credit costs for FY20-21F (S$3 to 3.5bn) and gross NPL ratio of 2.5-3.5% and believes that actual credit costs and NPL may end up at a lower range due to the experience from Malaysia thus far.

Net interest margin outlook.

  • NIM is likely to see a downward adjustment into 4Q20 due to low interest rates, likely for 4Q20 to be minimally at 1.52% or below; 3Q20 exit NIM was at 1.52%. OCBC is actively managing its cost of funds.

Loan moratorium details; positive experience from Malaysia thus far.

  • Loans under moratorium declined to ~5% of total loans in Oct 20 (Jul 20: 10%) adjusted for Malaysia’s relief programme, with 93% of the loans secured with real estate.
  • In Malaysia, consumer and retail loan repayments kicked in on 1 Oct and 1 Nov respectively. Two months of operations showed that 90% of loans previously under moratorium in these segments paid P+I on their due dates. Lenders of about 10% and 20% of Malaysia retail and business loans have requested for further relief which includes modified repayments (i.e. reduced principal payments). Most of these customers are able to make their interest payments.

Singapore loans under moratorium remain stable, ahead of the expiry of loan moratorium at end-2020.

  • OCBC has contacted ~90% of its customers, and only 4-5% of them have indicated a further need for assistance. Note that 96% of Singapore loans under moratorium are secured.

Management remains comfortable with Hong Kong loans under moratorium.

  • Management notes that these two months of repayments have been expected to be timely as these customers would likely be able to shore up some liquidity during this period. In the meantime, it is crucial to watch for developments in the next few months. OCBC continues to actively engage customers across the region ahead of the expiry of various loan moratoriums.

OCBC's dividend outlook.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-11-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.500 UP 9.300