OVERSEA-CHINESE BANKING CORP (SGX:O39)
Oversea-Chinese Banking Corp (OCBC) - Net Profit Forecast For 2021 Raised Due To Lower Credit Costs
- OCBC reported significant reduction in exposure to moratorium loans from 9% to 5% of group loans after expiry of the relief programme in Malaysia on 30 Sep 20. Over 90% of these borrowers in Malaysia have paid their first and second instalments for October and November on time after the expiry of loan moratorium.
- We raised our OCBC's net profit forecast for 2021 by 15% due to lower credit costs of 32.5bp (previous: 59.3bp).
- Maintain BUY due to an attractive 2021F P/B of 0.79x.
OCBC 3Q20 RESULTS
- OCBC (SGX:O39) reported net profit of S$1,028m for 3Q20, down 12% y-o-y but rebounding by 41% q-o-q. The results were above our expectations of S$922m.
NIM started to bottom.
- Loans expanded marginally by 1.7% y-o-y and 0.2% q-o-q. The q-o-q expansion was driven by Singapore and network customers in Australia and the UK. NIM narrowed 23bp y-o-y and 6bp q-o-q to 1.54% due to lower interest rates, causing net interest income to fall 11.2% y-o-y.
Broad-based rebound in fees with pick-up in customer activities.
- Fees rebounded 14% q-o-q, driven by wealth management (+23% q-o-q) and loans & trade related fees (+10% q-o-q). Customer activities resumed after reopening of branches (32 branches closed during Circuit Breaker were reopened in late-June) in Singapore.
- Bank of Singapore’s assets under management (AUM) grew 5% y-o-y to US$116b due to net new money inflows and higher valuations.
Strong growth in other non-interest income.
- Insurance contributed S$264m, an increase of 29% y-o-y. Great Eastern registered a rebound in weighted new sales of 51% q-o-q with growth from both Singapore and Malaysia. Net trading income was strong at S$255m, up 40% y-o-y, due to growth in customer flows.
Continues to front-load provisions.
- Provisions dropped 53% q-o-q to S$350m. General provisions of S$202m included management overlay of S$150m, which is in excess of the amount required by its macro-economic variable model.
- Credit costs receded from 111bp in 2Q20 to 52bp in 3Q20. NPL formation has moderated to S$270m, while recoveries & upgrades were maintained at S$200m. NPL ratio was unchanged at 1.6%.
OCBC - MANAGEMENT GUIDANCE
Exposure to moratorium loans significantly reduced.
- OCBC has reduced total loans under moratorium from S$23.7b at end-September to S$13.6b at end-October after adjusting for the end of Malaysia's relief programme on 30 Sep 20. As a percentage of group loans, the exposure was reduced from 9% to 5%. The proportion of moratorium loans secured with collateral, such as residential, commercial and industrial properties, expanded from 91% to 93%.
Smooth expiry of moratorium loans in Malaysia.
- The bulk of the reduction came from Malaysia where moratorium loans were reduced from S$11.8b to S$1.7b, of which businesses (mostly modified repayment) and individuals requesting further relief accounted for S$1.0b and S$0.7b respectively. Within Malaysia, the exposure to moratorium loans has contracted from 53% to 8% of country loans.
- From 1 Oct 20, OCBC provides targeted relief extension and loan repayment flexibility only on an application and approval basis (no longer blanket and automatic inclusion).
- Management attributes the vast reduction in moratorium loans to active engagement with borrowers to instill discipline in repayment and preserving liquidity. Over 90% of borrowers have paid their first and second instalments for October and November on time after expiry of loan moratorium, indicating that asset quality is benign.
Guarded optimism.
- OCBC has maintained guidance for peak gross NPL ratio at 2.5-3.5% and aggregate credit costs at 100-130bp for the 2-year period during 2020-21. Management is optimistic that eventual outcome could gravitate toward the bottom-end of the range at 2.5% and 100bp, although management cautioned against uncertainties relating to COVID-19 outbreaks in regional countries.
Opportunities in Sustainable Finance.
- OCBC sees opportunities for loan growth in sustainability & renewables, supply chain transformation, restructuring, acquisitions and overseas diversification. Management has set a target of S$25b by 2025 for green loans (current: S$13b). OCBC will tap on opportunities in green buildings, wind farm, solar power, waste management and water treatment.
RWA optimisation.
- OCBC Wing Hang could complete implementation of an internal ratings based approach to compute risk-weighted assets (RWA) by 4Q20 or 1H21. The exercise is expected to reduce RWA by S$7b.
Not looking at M&A for now.
- OCBC's management stressed that there is no M&A plan under review at the moment.
OCBC - EARNINGS REVISION & RECOMMENDATIONS
- We raised our OCBC's net profit forecast for 2021 by 15% due to lower credit costs of 32.5bp (previous: 59.3bp). We have factored in aggregate credit costs of 111bp during the 2-year period in 2020 and 2021.
- Maintain BUY. Our target price for OCBC is based on 1.19x 2021F P/B, derived from GGM (ROE: 8.8%, COE: 7.5%, Growth: 1.0%). Valuation is attractive with 2021F P/B at 0.79x.
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
- See also
Jonathan KOH CFA
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2020-11-06
SGX Stock
Analyst Report
13.48
UP
11.480
