Covid-19 Uncertainty, But Better Dividend Visibility

• OCBC Bank (SGX:O39)’s 2019 earnings came marginally ahead of MKE/Street bolstered by trading income. Allowances for credit losses though came in significantly higher than our already bearish assumptions. While this was mostly from legacy O&G exposure, elevated credit costs are unlikely to abate given risks to customers from the Covid-19 epidemic and slower North Asian growth.
• Nevertheless, we welcome OCBC's move towards progressive dividends and managing excess capital. This lowers earlier risks to dividend visibility and M&A uncertainty.
• We have raised our Target Price by 3% to SGD11.57. Maintain HOLD.
• We prefer UOB (SGX:U11) for stronger ASEAN exposure.

Near Term Likely Dominated by Covid-19 Risks

• Management claims Covid-19 Tier-1 impact sector (hospitality, F&B, airlines etc.) exposure is 6% of loan book, while Tier-2 (manufacturing etc.) is a further 4%. A Tier-1 distress may raise credit charges towards 25-30bps, based on OCBC estimates.
• Given the rapidly evolving situation and potential for a prolonged outbreak, we estimate credit costs of 20- 34bps in 2020-2022E (2019 34bps including special charge in Indonesia). We also expect NPLs to rise to 1.7% by 2021E (from 1.5%) from supply chain disruptions and falling consumption.

Focus on Dividends a Strong Positive

• OCBC’s fresh progressive dividend approach will see it paying at least the previous year’s per share quantum. In 2019, total dividends increased 23% y-o-y. Based on this, we estimate 2020E dividends may be at least SGD0.56 – which offers a 5.1% yield (55% pay out vs.48% 2019).
• Management also claims they are not looking at any immediate transactions for M&A. Overall, this lowers a significant portion of uncertainty in terms of OCBC’s capital deployment and yield visibility, in our view.

Raising Target Price to SGD11.57. Maintain HOLD

• Following 2019 results, we lower 2020-2021E EPS by 4-7% to account for Covid-19 growth risks and higher provisioning costs. Nevertheless, we raise our absolute dividend expectation by 5-10% to reflect the Group’s new pay out approach. As a result, we raise our multi-stage DDM (COE 9.7%, 3% terminal) target price to SGD11.57 from SGD11.26.
• With 5% upside, maintain HOLD.
• Lower than expected impact from credit charges due to Covid-19 holds risks on the upside to our target price, we believe.

Source: Maybank Kim Eng Research - 23 Feb 2020