• Recorded best y-o-y NIM performance amongst peers at +7bp in FY19; guides up to 7bp in FY20 NIM compression. We factor in -4bp on SIBOR strength.
• Expect credit costs to rise several bps due to outbreak. Most of the impact buffered by absence of O&G impairments (two-thirds of FY19 total) in FY20F.
• Reiterate HOLD with lower target price of SGD11.64 as we factor in credit costs for Covid-19.
• DPS raised to S$0.53 but M&A risks from high capital remains.

We Expect Insurance and Wealth Income to Sustain FY20F Earnings

• OCBC Bank (SGX:O39)'s FY19 earnings were lifted by strong wealth (fees +8% y-o-y) and insurance (+7% y-o-y) segments, as well as trading income (+92% y-o-y) primarily emanating from MTM gains from Great Eastern Holdings (SGX:G07).
• In FY20F, OCBC forecasts revenue to be affected by 2% from the virus outbreak, with most of this felt by segments such as credit cards. That said, we expect non-II momentum to continue; net new money growth should stay strong (BOS’s AUM +15% y-o-y to US$117bn) and we are positive on stronger insurance contributions from higher regular-premium product sales.
• We think NII growth could slow to 2% (vs. FY19’s 7%), as capped by reduced policy rates and the low-single-digit loan growth guidance in FY20F.
• OCBC expects y-o-y NIM compression of up to 7bp, but continued strength in S$ rates could provide some relief. At this juncture, we pen in -4bp y-o-y to 1.73% in FY20F.

4Q19 Impairments Mainly Due to Further Write-down of O&G Book

• Excluding one-off impairments for OCBC NISP’s IFRS9 adoption, FY19 provisions of S$746m translated to a higher 29bp credit cost (FY18: 12bp). SPs remained high at 41bp; two-thirds of this was due to a further write-down of its O&G portfolio for vessels with no visibility of upcoming charters for longer than a year.
• About 25% of upgraded NPLs (total upgrade/recoveries: S$664m) were related to this O&G exercise and recoveries are expected to continue into FY20-21F.

Several Bps Impact on FY20F Credit Cost From Virus Outbreak

• FY20F credit costs should improve as O&G issues (65% of FY19 impairments) clear up, but management guides for Covid-19 impairments to completely offset the improvement, and push y-o-y credit costs up by several bps. This implies a seemingly larger impact than peers have guided despite its smaller 6% loan exposure (c.S$16bn) to segments directly impacted by the outbreak (retail trade, hospitality, aviation, etc.).
• OCBC identified another 4% of its loan book as sensitive to 2nd order effects (e.g. manufacturing and trade related to China) – downside risks could stem from this book. We factor in credit costs of 29bp in FY20F – most of it due to the virus outbreak.

Reiterate HOLD; 1.06x P/BV Inexpensive But Virus Could Cap Upside

• Dividend policy will now be on a progressive basis (previously 40-50% payout ratio), thus we raise FY20F DPS to S$0.53/share. OCBC is inexpensive at 1.06x P/BV (1 s.d. below mean), but we think downside risks of asset quality deterioration from Covid-19 may cap share price upside.
• Neutralisation of HK uncertainties is an upside risk.

Source: CGS-CIMB Research - 23 Feb 2020