Oversea-Chinese Banking Corp Ltd – Earnings hoisted on stellar trading gains February 24, 2020 1019

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: S$11.97 Target Price: S$12.1
  • 4Q19 revenue and earnings exceeded expectations. Net profit grew 34% YoY and QoQ improvement of 6% despite seasonally slower 4Q compared to 3Q.
  • NII grew 6% YoY on 7bps NIM expansion and modest loans growth of 3%. NIM held steady at 1.77% QoQ on lower funding costs despite pressure on asset yield.
  • Non-interest income grew 58% YoY, with the quadrupling of other NII from trading income, and double-digit growths experienced across fee income (+17% YoY) and insurance income (+25% YoY).
  • Final dividend of $0.28 to bring FY19 distribution to $0.53 per share compared to $0.43 in FY18 (+23% YoY). This translates to a c.4.8% dividend yield based on current prices.
  • We maintain ACCUMULATE at a higher target price of S$12.10 (previously S$11.70). We roll forward our Gordon Growth Model to FY20e without changes to estimations.


The Positives

+ NII grew 6% YoY on better NIM (4Q19: 1.77% vs. 4Q18: 1.72%) and modest loans growth (+3% YoY). NIM was held steady QoQ through the management of funding costs despite pressure from lower asset yields as a result of macroeconomic conditions.

+ Another quarterly record in fee income. Fee income rose 17% YoY to $556mn, above the previous quarterly record of $550mn. The bank continues to experience strong WM (+31% YoY) and loan-related fees (+17% YoY) to see fee income grow for 4 consecutive quarters.

+ Insurance income recovered from a year ago to grow 25% YoY. Premium income increased by 7% YoY while investment income reversed losses on mark-to-market gains. Overall, Great Eastern Holdings put up a 4Q strong performance helped to lift net profit contribution to the bank’ by 38% to $832mn in FY19 (FY18: $604mn).

+ Other non-interest income quadrupled on better trading income. Trading income skyrocketed to $316mn from $9mn the previous year driven by higher gains on treasury activities, rise in customer flow income as well as mark-to-market gains.


The Negatives

– Operating expenses rose 17% attributed to higher staff costs. While CIR improved to 43.3% in 4Q19 compared to 45.9% in 4Q18, the impact of the cost increase was largely offset by exceptional growth in earnings.  Operating margins may narrow as income normalise in the long run, and the bank is placing emphasis on cost management to achieve a stable 40% CIR.



OCBC continues to exhibit strong financial and capital position; with CET1 ratio higher at 14.9% compared to 14.0% a year ago. To provide a progressive and sustainable dividend consistent with long-term growth, OCBC has proposed a final dividend of 28 cents, bringing FY19 dividend to 53 cents, an increase of 23% from FY18 (43 cents).

Expected improvements to allowances in 2020 may be offset by the impact of Covid-19 outbreak. The bank saw 4Q19 recoveries and upgrades of allowances from impairment to OSV loan book. While asset quality should improve moving forward after one-time write-off, allowances may be strained as a result of the Covid-19 virus. The outbreak has a potential impact on up to 10% of the loan book by the bank.

Our growth outlook remains muted. NIM contraction in FY20e will offset growth in loans. FY20e growth will stem from fee income and trading gains. Credit cost is expected to be stable. There has been no observable worsening of loan quality from Greater China.


Investment Actions

We maintain ACCUMULATE at a revised target price of S$12.10 (previously S$11.70).  We roll forward our Gordon growth model to FY20e with no changes to underlying assumptions. Our FY20e forecasts remain on the lower band of management guidance; with NIM back to FY18 levels (1.70%) and a slower loan growth accompanied with slower macroeconomic conditions.

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