• We forecast net profit of S$1,063m for 4Q19, up 14.8% y-o-y (low base in 4Q18) but down 9.3% q-o-q (seasonal pullback). We expect NIM compression of 3bp q-o-q, growth in fee income of 9.9% y-o-y and lower credit costs of 18bp.
• The outbreak of SARS during 2003 had a limited impact on OCBC (SGX:O39)’s asset quality. Contrary to widely held perception, OCBC’s NPL ratio improved 1.2ppt to 6.9% in 2003.
• We expect DPS to increase 4% to 52 S cents in 2020.
• Maintain BUY at Price Target SGD12.80

What’s New

Muted loan growth.

• We expect muted loan growth of 2.7% y-o-y and 0.7% q-o-q in 4Q19. Demand for loans from the domestic market remains lacklustre. The tepid loan growth was mainly supported by customers’ expansion overseas to acquire commercial buildings, hospitality properties, student accommodation and data centres. The drawdown for residential mortgages remains muted.

NIM compression.

• We expect NIM to narrow by 3bp q-o-q but expand 2bp y-o-y to 1.74% in 4Q19. Loan yield eased as 3-month SIBOR and SOR receded 11bp and 14bp q-o-q respectively to 1.77% and 1.54%. Competition for housing loans has also intensified.

Maintained growth momentum for wealth and cards.

• We see growth momentum maintained for wealth management fees with continued growth in AUM, while fees from credit cards saw the usual seasonal up-tick. Overall, we expect fees & commissions to increase 9.9% y-o-y (low base in 4Q19) but recede 5.3% q-o-q (seasonal weakness).
• We expect the insurance business to contribute income of S$210m (life insurance: S$170m, general insurance: S$40m). We expect net trading income to be seasonally lower at S$100m (3Q19: S$182m).

Slight positive JAWS.

• We expect operating expenses to increase 5.0% y-o-y in 4Q19. Cost-to-income ratio (CIR) is seasonally higher at 45.5% (4Q18: 45.9%, 3Q19: 42.6%). Pre-provisions operating profit (PPoP) increased 6.8% y-o-y to S$1.3b.

Expect lower credit costs.

• We expect NPL ratio to be stable at 1.59% in 4Q19. We estimate credit costs to be lower at 18bp, compared to 35bp in 9M19 (marked down valuation for offshore support vessels in 1Q19, downgraded two corporate accounts from transportation and oil & gas sectors in 3Q19).

Stock Impact

Beneficiary of partial trade deal between the US and China.

• We forecast net profit of S$1,063m for 4Q19, up 14.8% y-o-y (low base in 4Q18) but down 9.3% q-o-q (seasonal pullback).

Limited impact during outbreak of SARS.

• The outbreak of Severe Acute Respiratory Syndrome (SARS) during 2003 had a limited impact on OCBC’s asset quality and financial performance. NPL ratio receded from 8.1% in 2002 to 6.8% in 2003. Credit costs receded from 97.5bp in 2002 to 43.9bp in 2003 and 14.3bp in 2004. Loan loss coverage improved significantly from 67.1% in 2003 to 83.3% in 2004.
• Earnings wise, net profit increased 43% to S$954m in 2003 and grew another 22% to S$1,162m in 2004.

Banks are yield plays.

• We expect OCBC to increase DPS by 4% to S$0.52 for 2020F (S$0.26 per half a year), which represents dividend payout ratio of 48.5%.

Earnings Revision / Risk

• We maintain our existing earnings forecast.

Valuation / Recommendation

• Maintain BUY. Our target price is based on 1.18x 2020F P/B, derived from the Gordon Growth model (ROE: 10.0%, COE: 8.5% (beta: 1.2x to 1.3x), Growth: 0.0%).
• Valuation is attractive with 2020 P/B at 1.1x and dividend yield at 4.7%.

Share Price Catalyst

• Expansion in China’s Greater Bay Area.
• Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.

Source: UOB Kay Hian Research - 10 Feb 2020