Oversea-Chinese Banking Corp (OCBC) - UOB Kay Hian 2021-05-10: 1Q21 New Dawn & New Beginning


Oversea-Chinese Banking Corp (OCBC) - 1Q21 New Dawn & New Beginning

  • OCBC (SGX:O39) surpassed expectations due to strong contributions from wealth management fees (+10% y-o-y), insurance (tripled y-o-y) and net trading income (+20% q-o-q), as well as lower provisions (-75% y-o-y).
  • New CEO Helen Wong will focus on capturing flows between ASEAN and Greater China, retail wealth management, sustainable finance and digitalisation.
  • OCBC provides attractive dividend yields of 4.0% for 2021 and 4.5% for 2022. 2021 P/B is attractive at 1.09x.
  • Maintain BUY. Target price: S$15.50.

OCBC's 1Q21 Results

  • OCBC's net profit of S$1,501m for 1Q21 (up 115% y-o-y and 33% q-o-q) was above our expectation of S$1,177m and consensus estimate of S$1,153m.
  • Net interest income declined 11% y-o-y. OCBC’s loans expanded 0.2% y-o-y and 1% q-o-q. On a sequential basis, growth was driven by network customers in Greater China (+3% q-o-q) and rest of the world (+7% q-o-q). Sustainable finance expanded 9% q-o-q to S$15.3b. NIM compressed 20bp y-o-y but was stable q-o-q at 1.56%.
  • Buoyant market sentiment drove recovery in customer activities. Fees & commissions expanded 7% y-o-y and 13% q-o-q, driven by wealth management (10% y-o-y and 28% q-o-q) and brokerage & fund management (25% y-o-y and 14% q-o-q). Growth in wealth management was driven by increased customer and investment activities as market sentiment recovered. AUM expanded 18% y-o-y and 1% q-o-q to US$123b.
  • Non-interest income exceeded expectations. Insurance contributed earnings of S$470m, an expansion of 140% q-o-q, due to mark-to-market gains from favourable market conditions. Net trading income grew 20% q-o-q to S$316m due to higher customer flows (73% of income). Other non-interest income grew 42% q-o-q.
  • Cost efficiency improved. Total income expanded by 17% y-o-y but operating expenses increased by a slower 4% y-o-y. Thus, cost/income ratio improved 5.1ppt y-o-y to 39.4%.
  • Asset quality has stabilised. The NPL ratio was stable at 1.5%. NPL formation remains elevated at S$375m due to one-time reclassification of loans under relief programmes for Malaysia and Indonesia. Recoveries & upgrades were higher at S$344m (1Q20: S$153m, 4Q20: S$198m) driven by offshore support vessels and transportation sectors. Total provisions dropped 43% q-o-q to S$161m, driven by a decline in general provisions from S$48m to just S$9m. Specific provisions of S$152m (1Q20: S$275m, 4Q20: S$237m) were mainly for the remaining exposure for the oil & gas sector (net of provisions and collaterals, offshore support vessels is only 0.1% of total loans).
  • OCBC's CET-1 CAR improved 0.3ppt q-o-q to 15.5% due to strong earnings this quarter.

OCBC's FY21 guidance.

  • OCBC's management upgraded guidance to mid to high single-digit loan growth of 5% for 2021 (2020: +0.5%). NIM is expected to stabilise at 1.50-1.55%. Management expects credit costs to be at the lower end of guidance of 100-130bp over the 2-year period (2020: 67bp).

Loan growth should pick up in subsequent quarters.

  • Outlook is positive as the US is benefitting from monetary and fiscal stimulus in Malaysia (advanced manufacturing), Vietnam and Indonesia.

OCBCs 4 priorities to generate sustainable growth.

  • OCBC's new CEO Helen Wong emphasised focus on organic growth from:
    1. capturing investment and trade flows between ASEAN and Greater China,
    2. retail wealth management,
    3. sustainable finance, and
    4. accelerated growth in digitalisation.

Further reduction of loan relief programmes.

  • OCBC's exposure to loans under moratorium dropped by 10.5% from S$5.7b (2.1% of total loans) in Jan 21 to S$5.1b (1.9% of total loans) in Mar 21. 92% of the management does not intend to write-back provisions.

Paying sustainable dividends.

  • OCBC estimated that maintaining dividend payout at economic shocks, which has been aptly demonstrated amid the COVID-19 pandemic.

Earnings Revision

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-10
SGX Stock Analyst Report BUY MAINTAIN BUY 15.50 UP 15.050