More Dividends, But No Less Urge to Shop

• OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s 1H19 core-earnings came in marginally ahead of Street & MKE expectations.
• Stronger NIMs and trading income were key contributors. Operationally, these drivers should continue to deliver in 2H19. But 2Q19 total loan loss allowances increased 5x y-o-y. Slowing growth in Singapore and volatility in HK/China, which account for nearly 80% of PBT, may further exacerbate this trend.
• Given the surprise higher 2Q19 interim dividend, we think the full year payout should come in at the upper end of guidance; This is welcome. Yet it still leaves significant capital available for acquisitions, creating material execution risks, in our view.
• We have lowered our multi-stage DDM based Target Price by 2% to SGD11.05.
• With 3% downside, maintain HOLD.

Higher Payout, But Not Enough

• OCBC raised its interim dividend to SGD0.25 (vs. SGD0.20 in 2Q18). Assuming this is at least matched in the final dividend, the total payout should come in around 46% - the highest since 2011 – resulting in a 4.4% 2019E yield, which is almost on par with the rest of the sector.
• However, OCBC has a high CET1 ratio of 14.4%. Assuming a more comfortable level of 13.5% and 80% of the dividend is taken up as scrip (as has been the case historically) OCBC should have SGD5.9bn of excess capital (12% market cap) by end 2019E. This may be deployed for acquisitions.
• Management claims there are active opportunities they are considering, which raise significant execution and earnings visibility risks, in our view.

Asset Quality Needs to be Watched

• OCBC's 2Q19 gross NPL ratio has increased 10bps y-o-y to 1.5%. Given rising macro uncertainty – particularly in trade related sectors - we believe asset quality should see further pressure going forward. We have raised 2019E- 2021E credit charge assumptions by an average of 7bps each to reflect this.

Lower Target Price to SGD11.05. Maintain HOLD

• Our post 2Q19 changes to operating income and credit charges result in a +1% to -3% change in our 2019E-2021E core-earnings. Our multi-stage DDM (COE 9.7%, 3% terminal) Target Price has been lowered 2% to SGD11.05.
• HOLD.

Source: Maybank Kim Eng Research - 4 Aug 2019