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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Jan 2021, 9:32 AM

 

OCBC - Share Price to See Support; Upgrade to BUY

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  • OCBC's current valuations still inexpensive at near 1 SD below its average 15-year forward P/BV.
  • While OCBC faces ongoing NIM repricing, non-interest income should continue to contribute positively.
  • Some negatives, including lower net interest income and overhang from asset quality, have been priced in.
  • Upgrade to BUY.

Inexpensive Valuation; Ongoing Provisioning Provides Buffer

  • While Hin Leong accounted for most of special allowances across banks in 1Q20, OCBC (SGX:O39) also took the opportunity in 2Q20 to further write down the remaining offshore support vessel NPLs, resulting in higher special allowances.
  • OCBC's management is now guiding for peak NPL ratio and credit costs to come in at the lower end of the 2.5-3.5% range and 100-130bps credit costs through FY20-21F (S$3-3.5bn) previously guided.
  • We believe that OCBC’s strong NPA coverage of 109% (2Q20: 101%) and ongoing provisioning of S$1.8bn as of 9M20 will limit downside risks and we expect further provisions to be written in 4Q20 to pave the way for ROE and earnings recovery into FY21F.

Continued Management of Cost of Deposits

  • In the meantime, OCBC continues to manage down cost of deposits. W.e.f. October 2020, its flagship deposit account could see up to a ~17-bp decrease in interest rates for the bulk of its accounts. We believe this should partially mitigate loan yield decline as the loan book continues to reprice into 4Q20 on lower interest rates.

Support From Non-interest Income Franchise

  • There may be further NIM headwinds into 4Q20 as OCBC’s loan book continues to reprice. However, we believe the bank’s strength in non-interest income franchise should continue to contribute positively, providing some income support for FY21F, alongside good activity levels for wealth management and improved outlook for Great Eastern Holdings (SGX:G07).

Overhang From Scrip Dividend Policy Removed

  • There have been concerns that OCBC’s steep discount (i.e. 10%) on its scrip dividends may signal management’s intention of future acquisitions, given that OCBC’s strong capital position may not have warranted the discount factor. As management has stated that there are no M&A plans in place, we believe that the overhang may have been removed.
  • Should there be no further M&A plans in place, with the upcoming RWA savings from HKMA’s approval of WHB-IRAB transition earliest by end-2020, we believe that excess capital at the end of the credit cycle may be returned to shareholders.

OCBC - Valuation

  • Upgrade OCBC to BUY. Our revised target price of S$11.10 is based on the Gordon Growth Model (9% ROE [previously 8%], 3% growth, 9% cost of equity). This is equivalent to ~c.1x FY21F P/BV that is near 1 SD below its average 15-year forward P/BV multiple. We revise our earnings on better contributions from non-interest income.

Where We Differ

  • We remain conservative over OCBC’s income outlook into FY21- 22F; we believe that management is likely to continue adopting strict cost discipline to manage its bottom line.

Source: DBS Research - 24 Nov 2020

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Labels: OCBC Bank

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