OVERSEA-CHINESE BANKING CORP (SGX:O39)
Oversea-Chinese Banking Corp (OCBC) - Staying Vigilant On Asset Quality
- The resumption of economic activities, although uneven, had some positive impact on OCBC’s 3Q20 results.
- That said, management remains cautious on economic outlook and near term focus will be on managing asset quality and strengthening capital. Lingering concerns over potential rise in NPLs once borrowers exit relief programmes, we believe, would cap share price performance in the near term.
- Maintain NEUTRAL on OCBC with new S$9.50 target price from S$8.70, 6% upside.
OCBC's 9M20 earnings in line.
- OCBC (SGX:O39) booked a net profit of S$1,028m (+41% q-o-q; -12% y-o-y) for 3Q20 and S$2,455m (-32% y-o-y) for 9M20. Its 9M20 results were in line with our and Street estimates. Reported 9M20 ROAE was 7.0% vs 11.6% a year ago.
3Q20 PIOP fell 5% QoQ mainly on weaker topline.
- Net interest income declined 4% q-o-q as lower market rates led to a 6bps q-o-q NIM contraction to 1.54%. The resumption of business activities on phased re-opening of the economy saw broad-based rise in net fee income (+14% q-o-q), including the 24% q-o-q increase in wealth management fee to pre-COVID-19 levels.
- Still, non-II fell 2% q-o-q as the higher fee income was offset by a lower trading income (-21% q-o-q) mainly from the decline in treasury income and lower marked-to-market gains from Great Eastern Holdings (SGX:G07)’s investment portfolio.
- Net profit rebounded sharply as provisions fell 53% q-o-q as 2Q20 charges included a S$350m write down in carrying value of existing offshore support vessels.
Asset quality stable.
- Non-performing assets (NPA) dipped 2% q-o-q on lower new NPA formation, higher recoveries and write-offs. NPL ratio was stable at 1.6% while NPA coverage improved to 109% (2Q20: 101%). Loans under COVID-19 relief programmes have declined to c.5% of total loans from 10% in July, helped mainly by expiry of Malaysia’s automatic moratorium on 30 Sep.
- Management’s 2-year credit cost guidance of 100- 130bps is unchanged although it now believes 100bps will be the more likely outcome. NPL ratio is expected to rise to 2.5%.
Still cautious.
- Management remains cautious on outlook and believes that regional economies are “stabilising” rather than “recovering”. It will closely monitor borrowers’ repayment behaviour and watch for clearer signs of recovery in the real economy.
- For now, management plans to keep loan growth at low to mid-single digit for 2021. NIM is expected to stabilise at c.1.52% from 4Q20. Fee income will remain a positive driver underpinned by a healthy demand for wealth management products.
OCBC - Earnings forecast and target price.
- We revise OCBC's projected net profit up by 12% for FY21F as we adjusted credit cost to reflect front loading of impairment charges in FY20F. Still, FY20F earnings are relatively unchanged as the upward revision in credit cost is offset by higher estimates of non-II and lower opex.
- Our target price for OCBC is raised to S$9.50 (from S$8.70) based on a GGM-derived f 0.82x.
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
Singapore Research
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-11-06
SGX Stock
Analyst Report
9.50
UP
8.700
