Oversea-Chinese Banking Corp Ltd – Strong capital position to take advantage of opportunities August 10, 2021 214

PSR Recommendation: BUY Status: Maintained
Target Price: 14.22
  • 2Q21 earnings of S$1.16bn missed our expectation by 7% on higher-than-expected allowances. Allowances were largely for exposures to a large number of corporate customers in oil trading and offshore support vessels.
  • NIM rose 2bps QoQ, a nice surprise. As a result NII edged up 1% QoQ.
  • Provisions higher than expected. Total allowances of S$232mn were made up of S$131mn SPs and S$101mn GPs.
  • Maintain BUY with lower GGM TP of S$14.22, down from S$14.63. FY21e earnings reduced by 2.3% for higher allowances in view of the uncertain economic outlook. We peg our TP at 1.24x P/BV and 9.3% FY21e ROE. Catalyst expected from reversal of GPs.

The Positives

+ NIM surprisingly rose 2bps QoQ; NII up 1% QoQ (Figure 1). Loans grew 1% QoQ and 3% YoY, 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. NIM stabilised and edged up from balance sheet optimisation. Management expects NIM to be stable at 1.56%-1.58%, as it actively manages funding costs, including leveraging loan-to-deposit ratio.

+ Strong capital position to take advantage of opportunities and boost payouts. Following the lifting of the 2020 dividend cap by the MAS, an interim DPS of 25 cents has been declared. This is comparable to the interim DPS of 25 cents it paid in 2019 and represents a payout of 42%. The bank’s relatively lower dividend payout ratio of 42% in 1H21 pushed CET-1 ratio to 16.1% from 15.5% in the previous quarter. This means it has excess capital of S$6bn above its 13.5% efficient CET-1 ratio, which will allow it to manage its exposure in the region and take advantage of M&A opportunities.

 

The Negative

– Provisions higher than expected. Total allowances of S$232mn were made up of S$131mn SPs and S$101mn GPs. GP allowances were higher, largely attributable to management overlays set above IFRS 9’s Expected Credit Loss framework in view of the prevailing operating environment in regional markets.

Management is cautious on the asset-quality outlook in Malaysia and Indonesia, given a resurgence of COVID-19 cases and lockdowns in these two countries. It has set aside an additional 15bps of GPs this quarter to buffer its exposure. Group NPLs were stable at 1.5% in 2Q21.

Loans under moratorium remained at 2% of the total, unchanged from the last quarter. Its portfolio of relief loans, however, shrank to S$4.5bn in 2Q21 from S$5.1bn. Of these, 92% were secured.

Outlook

Loan growth to accelerate in 2H21

Loans grew a moderate 2.8% YoY in 1H21, trailing the bank’s guidance of a mid-to-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 13% QoQ to S$17.4bn and now forms 6% of its loan book. Mortgage pipelines in Singapore and Hong Kong are also healthy, with drawdowns expected in 2H21.

NPL uptick expected in 2H21

Non-performing assets rose 77% QoQ, mainly from Malaysia, Indonesia and some oil & gas accounts. We expect loans under relief to nudge higher as lockdowns persist in Malaysia and Indonesia. In anticipation of this, management set aside higher provisions in 2Q21. It believes cumulative provisions of S$600mn will be sufficient at this stage. Credit-cost guidance of 100-130bps for 2021 is unchanged.

We tune up FY21e provisions by 14.5% in view of the more uncertain economic outlook.

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About the author

Profile photo of Terence Chua

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

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