OCBC - CGS-CIMB Research 2021-05-08: Loaded With Capital

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OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC - Loaded With Capital

• We see upside to OCBC’s credit cost guidance of ~33bp in FY21F as asset quality stabilises. Management overlay writebacks unlikely until uncertainties ease.
• 15.5% CET1 implies ~S$4bn excess capital. Possible M&A: Citi’s business.
• Reiterate ADD on OCBC. Gradual economic recovery should support fee income levels.

OCBC to leverage on Singapore and Greater China connectivity

• Robust insurance income (mainly MTM gains from Great Eastern) and strong trading income were key drivers of OCBC (SGX:O39)’s 1Q21 net profit beat.
• Alongside a gradual economic recovery (albeit uneven across countries), which should support fee income levels in the coming quarters, OCBC sees ample opportunity in capturing business flows between ASEAN and Greater China, and credit growth of its network customers in the UK.
• Sectoral liquidity, such as in healthcare, transport and new economy sectors, will likely drive loan growth towards the mid-to-high single-digit range in FY21F (FY20: +0.5%).
• Baseline support for NII will come from a pick-up in business activity (not pricing wars).

We think there is upside to OCBC’s ~33bp credit cost guidance

• OCBC’s proportion of loans under moratorium was unchanged at 2% (~S$5bn) of group loans in 1Q21. While repayment trends have been healthy, OCBC is conservatively guiding for impairments to trend at the lower end of its 100-130bp range over FY20-21F; this implies ~33bp in FY21F.
• OCBC still views peak NPLs of 2.5-3.5% as a possible scenario (currently 1.5%), on the back of uncertain market conditions and a resurgence of COVID-19 infections (leading to possible lockdowns). Breaking down 1Q21 credit costs of 24bp (calculated), about half of its 23bp of specific provisions (SPs) relates to remaining O&G exposures, meaning that underlying SPs trended much lower to ~11bp (from an average of 41bp in FY20).
• Although OCBC thinks it prudent not to write back management overlays of impairments just yet, we think that the more positive asset quality trends provide upside to its ~33bp guidance. We expect ~25bp in FY21F.

Strong 15.5% CET1 position gives room for M&A

• Steady earnings accretion, RWA model refinements, and OCBC Wing Hang’s adoption of the internal ratings-based model over the past year propelled OCBC’s CET-1 to 15.5% in 1Q21 — above its optimal target of 13.5% (higher end of its 12.5-13.5% guidance) — and excess capital to over S$4bn.
• Any M&A exercise would likely be in its core markets and business pillars — which includes capturing wealth management flows between Greater China and SG. OCBC is open to evaluate suitable deals — we think that Citibank’s consumer businesses (e.g. Indonesia, Malaysia, Thailand) could be a good fit.

Reiterate ADD on OCBC with a higher GGM-based Target price of S$13.75

• We raise our OCBC's FY21-23F earnings per share forecast by 7-9% as we factor in heightened wealth income levels and stronger fee income, keeping in mind that market volatilities could drag insurance and treasury income going forward.
• We raised OCBC's FY21F dividend forecast to S$0.50 — aligning with our view of MAS lifting its dividend cap this year.
• See
  • OCBC's Share Price,
  • OCBC's Target Price,
  • OCBC's Analyst Reports,
  • OCBC's Dividend History,
  • OCBC's Announcements,
  • OCBC's Latest News.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-08

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