Oversea-Chinese Banking Corp (OCBC) - Phillip Securities 2021-11-08: Outlook Stable Along With Lower Allowances

OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corp (OCBC) - Outlook Stable Along With Lower Allowances

OCBC (SGX:O39)'s 3Q21 earnings PATMI of S$1.22bn in line with our estimate. 9M21 PATMI is 80% of our FY21e forecast on lower-than-expected allowances.
NIM fell 6bps q-o-q, though NII remained flat in the same period and grew 3% y-o-y.
Provisions were 53% y-o-y lower to S$163mil due to lower SPs and GP write-back. Asset quality suffered due to an increase in loans under relief in Malaysia.
Maintain BUY with an unchanged target price of S$14.22. We raise FY21e earnings by 1.8% as we increase profits of associates. Our target price remains unchanged at 1.24x P/BV and 9.3% FY21e ROE. Catalyst includes lower provisions and higher interest income as economic conditions improve.

Fee and commission income grew 14% y-o-y and 1% q-o-q, particularly from wealth management income which made up 35% (S$897mil) of the Group’s income in 3Q21. The Group’s assets under management (AUM) fell to S$123bn, matching 1Q21, mainly due to the decline in market valuations which offset net new money inflows.

OCBC was able to write back GPs of S$22mil during the quarter as the credit environment improved while SPs of S$185mil were made. Total NPAs rose by 4% q-o-q to S$4.2bn, mostly attributed to downgrades of secured consumer loans in Malaysia. Nonetheless, OCBC has set aside S$185mil of SPs this quarter mainly for corporate and consumer accounts in Malaysia and Indonesia. Group NPLs were stable at 1.5% in 2Q21.

NIM declined by 6bps q-o-q mainly due to the classification of loans to NPL (mostly from downgrades of secured consumer loans in Malaysia) and more competitive corporate loans which resulted in lower asset yields. As such, management expects NIM to maintain at 1.5%-1.52% until 1H22. Nonetheless, NII grew 3% y-o-y and remained flat q-o-q, underpinned by loans growth of 4% q-o-q and 6% y-o-y, backed by demand from Greater China, Singapore and the United Kingdom. Loan growth this quarter was led by higher loans to the building and construction sector.

Loans under moratorium remained at 2% of the total, unchanged from the last quarter. The portfolio of relief loans, however, increased to S$6.3bn in 3Q21 from S$4.5bn. The increase was due to an increase in Malaysia’s relief loans to S$4bn in 3Q21 from $1.5bn, representing 19% of Malaysia’s total loans. Nonetheless, management has mentioned that the majority of loans under moratorium are performing loans, with all loans under moratorium in Singapore performing and about 20% of Malaysia’s loans under moratorium non-performing. Management expects the non-performing loans under moratorium to drop with the improving economic situation. 89% of all loans under moratorium remain secured.

Loans grew 6% y-o-y in 3Q21, trailing the bank’s guidance of a high single-digit increase for FY21e. Management, however, believes its target is achievable. It sees lending opportunities in the wholesale segment and sustainable financing. Green and sustainable finance was up 12% q-o-q to S$19.5bn and now forms 7% of its loan book. Mortgage pipelines in Singapore and Hong Kong are also healthy, with drawdowns expected in 2H21.

OCBC’s total exposure to mainland China remains at 11% of Group loans, with onshore exposure at S$6bn and offshore exposure at S$26bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Less than one-third of the Group’s Mainland China onshore exposure (S$2bn) are corporate real estate loans, largely lending to the bank’s network customer. NPL ratio for non-bank Mainland China loans dipped to 0.3% from 0.5% in the previous quarter.

Non-performing assets rose 4% q-o-q, due to new NPA formation of S$804mil mainly from the downgrades of secured consumer loans in Malaysia offset by recoveries and upgrades of S$359mil mainly from several corporate accounts in the oil and gas support vessels and services sector. We expect loans under relief to nudge higher as the COVID situation recovers gradually in Malaysia and Indonesia. In anticipation of this, management set aside S$185mil of SPs this quarter mainly for corporate and consumer accounts in Malaysia and Indonesia.

We maintain our BUY recommendation on OCBC with an unchanged GGM target price of S$14.22. We raise FY21e earnings by 1.8% as we increase profits of associates. Our target price remains unchanged at 1.24x P/BV and 9.3% FY21e ROE. Catalyst includes lower provisions and higher interest income as economic conditions improve.
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Glenn Thum Phillip Securities Research | https://www.stocksbnb.com/ 2021-11-08

SGX Stock Analyst Report BUY MAINTAIN BUY 14.220 SAME 14.220