• We lower our sustainable ROE assumption to 9.5% from 10% and cut OCBC (SGX:O39)'s FY20F earnings, mainly on higher provision assumptions.
• Since our mid-March report, Singapore introduced “circuit breaker” measures – these were further tightened yesterday, which may lead to cash-flow issues for more businesses. We also append in this report some highlights from our recent teleconference with OCBC.

3-month SIBOR Has Fallen to the Current 1%

• 3-month SIBOR has fallen to the current 1% vs February’s 1.69% average. With lower lending yields, we forecast FY20 NIM of 1.68% vs FY19’s 1.77% – the bulk of the decline being back-loaded.
• OCBC is managing its deposit costs to reduce NIM compressions. Note that the bank posted NIMs of 1.66% in FY13 and FY14 when the US federal funds rate (FFR) was close to zero – which is where the FFR is now. The moratorium on loan repayments, eg for mortgages, is not expected to impact NIM, as interest will be accrued.
• An article in the Business Times earlier this week stated that OCBC received 3,000 requests to defer residential property loans and has approved > 90% of eligible applications.

Wealth Management Saw Robust 1Q20 Trading Activity

• OCBC has a high asset under management base and should see gains. Credit card fees will be weakened by the collapse in overseas travel, but this should be offset by more e-commerce purchases.

Provisions to Surge

• Asset quality will deteriorate, as Singapore’s GDP growth is likely to turn negative, in our view. We raise our FY20F NPL ratio to 2.1% from 1.9% and elevate our provisions for this period by 32% to SGD1.43bn, or 59bps credit costs.

We Cut FY20F Net Profit by 14% to SGD3.57bn

• Given the developments over the past month, we are cutting our FY20F earnings further. There may be further earnings downside if the Government introduces more drastic measures to contain COVID-19.

OCBC’s FY20F Yield of 6% Has Downside Risk

• OCBC has a strong capital position, with CET1 capital adequacy ratio (CAR) of 14.9% vs management’s comfort zone of 12.5-13%. We forecast a FY20 dividend of 48 cents/share, which gives a 6% yield – way ahead of the 10-year Singapore Government Bond yield of 1.04%. However, there is a risk that provisions could exceed our aggressive expectations – already one of the highest in the market – and actual FY20 dividends could come in lower.
• Our Target Price of $9.00 (HOLD) is 2SD lower than the 5-year P/NBV average of 1.14x, or 0.84x of 2020F NBV. We believe OCBC could see short-term price downsides due to the headwinds mentioned above.

Source: RHB Invest Research - 22 Apr 2020