OVERSEA-CHINESE BANKING CORP (SGX:O39)
OCBC Bank - A Careful Approach Going Into FY21
- We think OCBC’s 4Q20 NIM expansion could be short-lived due to stiff pricing competition. OCBC guides for NIM of 1.5-1.55% in FY21F (FY20: 1.61%)
- It sees FY21F credit cost trending towards the lower end of its 100-130bp guidance, implying ~S$700m impairment expenses (vs. S$2.0bn in FY20).
- Reiterate ADD for OCBC and GGM-based target price of S$12.52. Management’s optimism of a stronger recovery come 2H21F provides earnings upside from non-II growth.
Management maintains its cautious and careful stance
- See OCBC Bank 4Q20 Update - CGS-CIMB Research 2021-02-24: Reversal In NIM Compression for update on OCBC (SGX:O39)'s 4Q20 results.
- OCBC had a post-results briefing. Management remained cautious on its FY21F outlook as uncertainties persist.
- Expectations of stronger GDP growth underpins its mid-single-digit loan growth target for FY21F, while a better-than-expected outcome from the exit of regional loan moratoriums largely removes risks of a cliff effect in its impairment expenses ahead. Hence it guides for credit costs to trend towards the lower end of its FY20-21 guidance of 100-130bp, implying a stark drop in impairments to ~S$700m in FY21F (FY20: S$2bn).
- OCBC's group loans under moratorium dipped to 2% in Jan (3Q20: 9%).
We think there could be residual NIM pressure ahead
- Although we largely expected progressive funding cost savings for OCBC, its +2bp q-o-q NIM expansion in 4Q20 to 1.56% was a surprise. A combination of factors contributed to this, namely a roll-off of fixed deposits (-11% in 2H20) into CASA (+8% in 2H20) and steady rise in total deposits (+2.4% q-o-q) alongside dampened loan demand (-0.7% q-o-q).
- While a manoeuvred increase in its LDR (towards ~88% from 83.7% currently) will aid OCBC in keeping FY21F NIM at the higher end of its expected 1.5-1.55% target range, we think sequential NIMs could still trend lower on the back of stiff pricing competition, especially corporates with superior credit quality.
Hopes of stronger business volumes in 2H21F to drive non-II
- On balance, OCBC's total income in full-year FY20 dipped 7% y-o-y as the NII decline (-6% y-o-y) was exacerbated by a weak showing across insurance, fees, and treasury income drivers. Robust wealth management fees (+9% y-o-y) and controlled opex (-4% y-o-y) were the bright spots in FY20.
- Although OCBC views the recovery trajectory across sectors to be uneven, it expects stronger business volumes (and the bulk of credit expansion) in 2H21F onwards to spur non-II growth and offset the residual NII decline.
Reiterate ADD for OCBC; we are positive on Greater China advances ahead
- The expansion of OCBC’s Greater China (GC) franchise will remain a strategic priority when Ms Helen Wong takes over the helm in Apr 21. Greater China accounted for ~31% of group PBT in FY20 (due to weaker performance in other regions); OCBC aims for Greater China to sustainably make up 20-25% of PBT going forward.
- Notably, the successful adoption of the IRB approach by OCBC Wing Hang had boosted OCBC group’s CET1 ratio to 15.2% in 4Q20. While its strong capital levels are comforting, we are cognisant of potential M&A exercises going forward given the capital firepower (none in current pipeline).
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
Re-rating catalysts/downside risks
- The removal of the Monetary Authority of Singapore’s cap on dividends is a key potential re-rating catalyst.
- A significant deterioration in the credit quality of loans post-expiries of regional moratoriums is a downside risk.
Andrea CHOONG
CGS-CIMB Research
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LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-02-24
SGX Stock
Analyst Report
12.520
SAME
12.520
