OVERSEA-CHINESE BANKING CORP (SGX:O39)
OCBC Bank - 4Q20 Quarterly Earnings Crossed The S$1b Mark
- OCBC beat our expectations due to a combination of resilient fee income, robust net trading income, lower credit costs and growth in contribution from associate Bank of Ningbo. With CET-1 CAR at 15.2%, which is substantially higher than its target range of 12.5-13.5%, there is room for dividends to fully normalise to pre-COVID-19 levels.
- OCBC provides an attractive dividend yield of 4.6% for 2021 and 5.2% for 2022. 2021 P/B is attractive at 0.96x.
- Maintain BUY. Target: S$14.68.
OCBC'S 4Q20 RESULTS
- OCBC (SGX:O39) reported net profit of S$1,131m for 4Q20, down 9% y-o-y but up 10% q-o-q. The results were 28% above our forecast of S$882m.
Loan growth is muted.
- Loans grew by a marginal 0.9% y-o-y but contracted 1.2% q-o-q (expanded 0.3% q-o-q in constant currency terms) in 4Q20. Loans for Building & Construction and Transport, Storage & Comm grew 11% and 8% y-o-y respectively.
NIM enhanced by optimisation of deposit mix.
- NIM edged higher by 2bp q-o-q to 1.56% in 4Q20. Low-cost current accounts and savings accounts expanded 33% and 24% y-o-y respectively. CASA ratio improved a sizeable 12ppt y-o-y to 60%. OCBC reduced fixed deposits by 26% y-o-y, which improved the cost of deposits.
Non-interest income boosted by strong net trading income.
- Fees & commissions grew 3% q-o-q in 4Q20 driven by investment banking and fund management. Contribution from wealth management was flat q-o-q. Net trading income expanded 4% q-o-q to a strong S$264m (65% derived from customer flow).
Two exceptional items from Great Eastern.
- Pre-tax contribution from insurance declined 23% q-o-q due to a negative impact from higher insurance liabilities due to a lower discount rate of about S$100m. At the net profit level, this was offset by lower tax due to a one-off positive tax impact from finalisation of tax assessment for prior years at Great Eastern.
- Contributions from associates increased 38% y-o-y to S$131m, driven by Bank of Ningbo.
Credit costs eased after setting aside sufficient buffer.
- Gross NPLs contracted 6% q-o-q and NPL ratio improved 7bp q-o-q to 1.47% in 4Q20. General provisions fell 76% q-o-q in 4Q20 after having set aside a management overlay of S$405m in 9M20. Total provisions dropped 19% q-o-q. Credit costs receded by 10bp q-o-q to 42bp.
- The board proposed a final dividend of 15.9 cents. Dividend payout ratio was 39% for 2020. Scrip dividend is applicable to the final dividend.
STOCK IMPACT
Guidance points to lower credit costs in 2021.
- Management guided mid single-digit at the lower end of guidance of 2.5-3.5% for 2020 and 2021.
- Credit costs are also expected to be at the lower end of guidance of 100-130bp over the two-year period (2020: 67bp). The guidance on credit costs has factored in higher probability of default for loans under moratorium that were extended.
Orderly exit to loan relief programmes.
- Exposure to loans under moratorium dropped from 9% to 4% of total loans in 4Q20 (expiry in Malaysia) and further declined to 2% of total loans in Jan 21 (expiry in Singapore). 91% of the loans under moratorium of S$5.7b are secured by collateral.
Possesses capacity to pay more dividends.
- OCBC's CET-1 CAR has improved 0.8ppt q-o-q to 15.2%, which is substantially higher than its target range of 12.5-13.5%. The implementation of an internal M&A plans under review.
- Management intends to maintain dividend payout at 40-50%. MAS is expected to announce its guidance on DPS for Singapore banks in May-June.
Geographical diversification.
- OCBC will maintain two hubs in Singapore and Hong Kong. Singapore serves as the hub for Southeast Asia, while Hong Kong serves as the hub for North Asia. Over the longer term, management targets an optimal mix of Singapore contributing 50-55% of operating profits, Greater China 20-25%, Malaysia 10-15% and Indonesia 5-8%.
EARNINGS REVISION/RISK
- We keep our earnings forecast of OCBC for 2021 and 2022 relatively unchanged.
- Maintain BUY. Our target price of S$14.68 is based on 1.23x 2022F P/B, derived from the Gordon Growth model (ROE: 9.3%, COE: 7.75%, Growth: 1.0%).
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
- OCBC's valuation is attractive with 2021 P/B at 0.96x.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-02-25
SGX Stock
Analyst Report
14.68
UP
14.650
