OCBC - DBS Research 2021-02-25: Recovery In The Works

OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC - Recovery In The Works

OCBC's 4Q20 net profit ahead of expectations.
Driven by lower provisions, higher-than-expected NIM, as well as lower operating expenses.
S$0.159 per share dividends declared, representing ~39% payout.

OCBC (SGX:O39) reported revenues of S$2,485m (-15% y-o-y/ -2% q-o-q) with net profit of S$1,131m (-9% y-o-y, +10% q-o-q), ahead of expectations, as 4Q20 tax expense was substantially lower than previous quarters due to one-off positive tax impact from GEH tax assessment.
Adjusting for normalised tax rate, net profit would have been ~2% ahead of consensus. This was mainly driven by lower provisions, higher-than-expected NIM, as well as lower operating expenses.
OCBC's operating costs were tightened at -11% y-o-y/+2% q-o-q, resulting in cost-to-income ratio of 45.3% (3Q20: 43.2%). Capital ratios remain strong with CET1 and total CAR at 15.2%/17.9% respectively, highest amongst peers.

Net interest income of S$1,436 declined 11% y-o-y/1% q-o-q. Net interest margin (NIM) improved 2bps q-o-q to 1.56% on lower cost of funds while loan growth was -1% q-o-q. OCBC had previously guided for FY20 NIM to be 1.55-1.59% and actual FY20 NIM decline was better managed than anticipated.
Looking into 2021, OCBC's management is now guiding for mid-single-digit loan growth (previously low single-digit to mid-single-digit loan growth) on better expected recovery prospects in 2H21F.

Non-interest income of S$1,049m was mixed (-20% y-o-y/-6% q-o-q). Net fees and commissions increased 4% q-o-q/-7% y-o-y on higher investment banking, credit cards and fund management income; trading income increased 4% q-o-q/-17% y-o-y from higher investment gains and customer flow, profit from life insurance declined 33% q-o-q/43% y-o-y as GEH took provisions for higher expected future insurance claims.

This included management overlay of S$405m and MEV adjustments of S$244m. OCBC's 4Q20 total allowances was S$285m, 39bps (3Q20: S$350m, 47bps) of which general allowances (stage 1+2) was S$48m, 7bps (3Q20: S$202m, 27bps) and special allowances (stage3) were S$237m, 32bps (3Q20: S$148m, 20bps), driven by corporate accounts across various industries and markets.
NPA coverage improved to 115% (3Q20: 109%).

OCBC's management updated that in January 2021, business activities were very positive in almost all fronts of OCBC’s businesses, driven by better sentiment and confidence. Credit demand should return with stronger recovery expected by 2H21 and further recoveries in 2022 should the pandemic be contained.

Exit NIM for the year was at 1.56%. Management provided guidance of 1.5-1.55% which is on a prudent basis. Management will try to hold on to the 1.56% level and believes that any movements in NIM from exit NIM in 4Q20 will not be significant.
CASA is now at a record ~60% which should pave the way for a more sustainable NIM going forward. It remains tough to price up despite uptick in interest rates due to weak credit demand while competition for high-quality loans remains steep.
While there will be repricing of loans downwards to be continued into FY21F which will suppress NIM, management hopes that a more optimised LDR ratio of 85-90% (with more loan growth) will help to support NIM. There is room to manage cost of funds further, but the biggest magnitude of decline is over. There is also some leeway to manage asset yields slightly.

There was a 0.8% improvement on OCBC's dip into capital. Excess capital can be deployed for growth or returned to shareholders via special dividends.
Management maintains that there are no M&A plans at the moment due to unclear visibility on the horizon and management does not wish to undertake an M&A in a weakening market where resources are required to manage current portfolios.

Maintaining its guidance of 100-130bps for FY20-21F, OCBC's management believes actual allowances will end up overdue, NPL may spike up but loss component will be less than actual NPL amounts. Management is maintaining its NPL guidance of 2.5-3.5% for FY21F.

We believe there is further room for OCBC's share price to re-rate as we look forward to earnings growth in FY21F. While there may be some NIM pressures on repricing of loan yields, OCBC continues to manage cost of funds and optimise loan-to-deposit ratio.
OCBC’s strong non-interest income franchise should provide some income support for FY21F amidst lower provisions expected in FY21F.
See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2021-02-25

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