Oversea-Chinese Banking Corp (OCBC) - Phillip Securities 2020-11-09: Better Credit Outlook

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OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corp (OCBC) - Better Credit Outlook

• OCBC (SGX:O39)'s 3Q20 earnings dropped 12% y-o-y but improved 41% q-o-q to S$1,028mn as allowances halved from previous quarter.
• Fees and commissions were down 9% y-o-y but recovered to normalised FY19 level of S$500mn per quarter.
• Allowances of S$350mn were only 8% higher y-o-y despite generally high credit costs. SP dived to S$148mn from S$271mn a year ago.
• Loans under moratorium shrank from 10% to 5% of loan book, reducing risks of NPA formation in FY21.
• Maintain ACCUMULATE on OCBC with higher GGM Target Price of S$9.68, from S$8.92 previously.

The Positives

Non-interest income grew 6% y-o-y

• OCBC's life and general insurance income grew another 29% y-o-y while trading income increased S$255mn y-o-y. Wealth Management fees recovered from their low of S$205mn in 2Q20 to S$252mn. This lifted fees and commissions to S$501mn, comparable to their quarterly run rate in FY19.

Allowances halved from a quarter ago

• Total allowances of S$350mn were made up of S$148mn in SP and S$202mn in GP. This brought credit cost to 67bps, down from a front-loaded 87bps in 1H20. Total reserves of S$4,618mn provided for NPA coverage of 109%, an increase of 101% q-o-q. Guided credit cost of 50-60bps for FY20 seems reasonable.

The Negative

NII fell 11% y-o-y on a 23bp NIM compression

• NIM fell from 1.77% to 1.54% y-o-y and by 6bps q-o-q. It is likely to stabilise at such levels given liquidity conditions and low interest rates are likely to persist.

Outlook

Loans under moratorium shrank from 10% of loan book to 5%

• Despite stabilising economic conditions, OCBC believes recovery will be slow. It expects NPL ratio to come in at the lower end of the 2.5-3.5% range it guided previously. OCBC’s heavy provisioning in the first three quarters is likely sufficient to see it through FY21.

Investment Action

• Maintain ACCUMULATE on OCBC with higher target price of S$9.68, up from S$8.92. We hold our estimates for FY20e/FY21e and peg our valuation at 0.92x FY21e P/BV and an 8.6% ROE as allowances start to taper off.
• See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
• For sector exposure, still prefer UOB (SGX:U11) (Accumulate, Target Price: S$21.10). See report: United Overseas Bank - Phillip Securities 2020-11-09: Asset Quality Clarity To Mitigate Earnings Pressure.

Tay Wee Kuang Phillip Securities Research | https://www.stocksbnb.com/ 2020-11-09

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 9.68 UP 8.920