OVERSEA-CHINESE BANKING CORP (SGX:O39)
OCBC Bank - 2Q21 Balance Sheet Is As Solid As A Rock
- OCBC's earnings moderated 23% q-o-q in 2Q21 without one-off items, such as mark-to-market gains from insurance and huge net trading income, as seen in 1Q21. CET-1 CAR at 16.1% is significantly above the comfortable range of 12.5-13.5%, which indicates room to enhance dividend payout in 2022 when headwinds confronting Malaysia and Indonesia are expected to subside.
- OCBC provides an attractive dividend yield of 4.1% for 2021 and 4.6% for 2022. 2021 P/B is low at 1.1x.
- Maintain BUY. Target price: S$15.65.
OCBC'S 2Q21 RESULTS
- OCBC Bank (SGX:O39) reported net profit of S$1,160m for 2Q21, marginally below our forecast of S$1,198m. See OCBC's announcements.
- Muted loan growth. Loan growth was muted at 2.6% y-o-y and 1.4% q-o-q in 2Q21 driven by Singapore, Greater China and the UK, while by industry, loan growth was strongest in the building & construction sector. Sustainability loans accounted for half of all new loans. Net interest income was flat q-o-q at S$1,461m.
- Improved deposit franchise in Malaysia and Indonesia. NIM expanded 2bp q-o-q to 1.58% in 2Q21 due lower cost of deposits achieved in Malaysia and Indonesia by reducing high-cost fixed deposits and expanding low-cost current accounts and saving deposits. On a group-wide basis, CASA ratio has improved 5.8ppt y-o-y to 62.5%.
- Fees weathered sequential pullback. Wealth management fees grew 40% y-o-y (2Q20 was of a low base due to Circuit Breaker) but moderated by 10% q-o-q to S$288m due to Phase 2 (Heightened Alert) during the latter part of the quarter. Loans and trade-related fees grew 17% y-o-y. Overall, fees and commissions grew 28% y-o-y.
- Muted quarter for non-interest income. Net trading income was S$212m, a decline of 35% y-o-y. Insurance business contributed stable earnings of S$205m. Bank of Ningbo performed well as seen by growth from associates of 32% y-o-y.
- Headwinds in Malaysia and Indonesia. OCBC saw an uptick in NPL formation of S$662m in 2Q21. NPLs have dropped S$257m q-o-q in Singapore due to write-off for legacy exposures to the oil & gas sector. NPLs for Malaysia and Indonesia have increased by S$67m and S$194m q-o-q due to exposure to the manufacturing and building & construction sectors. Overall, NPL ratio was unchanged at 1.5%.
- Set aside general provisions for Malaysia and Indonesia. Credit costs were 30bp, sequentially higher than 22bp in 1Q21. OCBC made general provisions of S$110m in 2Q21 due to adjustments to macro-economic variables (MEV) and management overlays for exposures to Malaysia, Indonesia and Myanmar. OCBC would provide loan relief (moratorium loans) to support customers in Malaysia and Indonesia during 2H21.
- Cap on dividends lifted. OCBC has declared interim dividends of 25 cents for 1H21 (1H20: 15.9 cents). Scrip dividend scheme is not applicable to the interim dividend.
STOCK IMPACT
- Maintained guidance. Management guided mid-single-digit competency alignment in technology, data science and analytics. Singapore will serve as the hub for Asean, while Hong Kong will serve as the hub for Greater China. We expect refinement of OCBC's growth strategies going forward.
EARNINGS REVISION/RISK
- We kept our 2021 and 2022 net profit forecasts for OCBC relatively unchanged.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$15.65 for OCBC is based on 1.29x 2022F P/B, derived from the el (ROE: 9.7%, COE: 7.75%, growth: 1.0%).
- See
Jonathan KOH CFA
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2021-08-05
SGX Stock
Analyst Report
15.65
UP
15.520
