Weighed Down by Asset Quality + HK Uncertainties

• While OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s 9M19 earnings were in-line with Street/marginally ahead of MKE, this was mostly due to a lower effective tax rate. 3Q19 allowances increased 7x y-o-y from higher provisioning for HK, as well as specific corporate accounts & Indonesia.
• With a quarter of its loans booked in Greater China, we are cautious on asset quality going in to 2020E. Of course, the group’s strong provisioning levels and high CET1 should allow them to navigate these uncertainties.
• But with weaker guided loan growth, rising credit charges and an overhang of potential M&A, we see low upside to our revised Target Price (+2% to SGD11.26 following adjustments, see below) and maintain HOLD.

Lukewarm Operational Delivery

• OCBC's 3Q19 loans expanded just 2% y-o-y with weak growth in Malaysia and Greater China. Management is guiding for similar levels of growth in 2020E, coupled with contracting NIMs. See
• Fee income was a bright spot increasing 10% y-o-y from wealth management and investment banking. Insurance income fell 9% y-o-y establishing a contracting trend in 4 out of the past 5 quarters. Together with headwinds in North Asia and weakness in key markets, such as Malaysia & Indonesia, operational risks will need to be closely watched, in our view. See OCBC Bank Announcements.
• Separately, management’s claims of using excess capital for offensive purposes, opens up potential execution risks.

Asset Quality Need to be Watched

• Credit charges reached 50bps – the highest since 2009. Management claims part of this is from a one-off expected credit loss (ECL) model adjustment for Indonesia. The rest were from higher provisions for deteriorating macro conditions and charges against offshore service vessels and a large transportation client rescheduling payment. These are unlikely to be one offs, in our view and expect overall credit charges to rise going into 2020E.

Raise Target Price to SGD11.26. Maintain HOLD

• We have raised our 2019E earnings by 2% due to a lower effective tax resulting from write-backs from its insurance business. But we have lowered 2020-2021E earnings by 2-3% on lower NIMs, weaker loan growth and higher provisions.
• We roll forward our multi-stage DDM (COE 9.7%, 3% terminal) to 2020E to arrive at our new Target Price of SGDD11.26. With 2% upside, maintain HOLD.

Source: Maybank Kim Eng Research - 6 Nov 2019