• We forecast net profit of S$757m for 1Q20, down 38.5% y-o-y and 39.1% q-o-q, affected by lower contribution from insurance, lower trading income and additional specific provisions for exposure to Hin Leong.
• On a brighter note, management will strive to maintain DPS at current 56 S cents per year (28 S cents every six months) and robust CET-1 CAR of 14.9%, which is the highest among local banks.
• We see value with OCBC (SGX:O39) trading at 0.8x 2020 P/B and dividend yield of 6.4%.

Muted Loan Growth

• We expect OCBC (SGX:O39) to report a muted loan growth of 2.9% y-o-y and 0.5% q-o-q in 1Q20.
• Domestic demand for loans remains lacklustre. The tepid loan growth was mainly supported by customers’ expansion overseas to acquire commercial buildings, hospitality properties, student accommodation and data centres.

Continued NIM Compression

• We expect NIM to have edged down 4bp y-o-y and 4bp q-o-q to 1.72% in 1Q20. The Federal Reserve (Fed) had cut Fed funds rate by 150bp in March, which had resulted in the 3-month SIBOR and SOR falling 69bp and 32bp to 1.00% and 0.92% respectively in March.

Slower Growth in Fees

• We expect OCBC to have achieved 3.6% y-o-y growth in fee income in 1Q20. We expect contributions from wealth management to have increased 5% y-o-y due to positive sentiment in January and February. However, the circuit breaker period (7 April to 1 June) will result in less customers visiting its branches, causing reduced sales of investment products (OCBC has temporarily closed 22 of its Singapore branches from 9 April to 4 May but 24 branches remain open).
• We expect a 7% y-o-y decline in contributions from credit cards, hampered by curbs on overseas travel.

Lower Contribution From Insurance Business

• The correction in equity markets in March (FSSTI: -17.6%, KLCI: -8.9%) will result in mark-to-market losses for Great Eastern Holdings (SGX:G07)'s investment portfolios. We expect contribution from the insurance business to dive 49.3% y-o-y to S$140m in 1Q20.
• Net trading income would also be lower at S$80m (1Q19: S$285m), affected by losses from investment for Great Eastern Holdings's shareholders' funds.

Expect a Surge in General Provisions

• We expect a pick-up in general provisions, caused by:
  1. recalibration of macroeconomic variables; and
  2. more loans being downgraded from stage 1 to stage 2, which requires more provisions based on lifetime expected credit loss.
• OCBC has exposure of US$250m (S$360m or 0.14% of total loans) to oil trader Hin Leong, one of the largest suppliers of bunker to ships in Singapore. We have assumed provisions for Hin Leong to be made in 1Q20. Thus, we expect specific provisions to surge to 75bp. Overall, we expect credit costs to hit 90bp in 1Q20 (2019: 31bp).
• We have assumed new NPLs of S$748m during the quarter (4Q19: S$818m). We expect NPL ratio to have deteriorated by 17bp q-o-q to 1.62%.

Capacity to Generate Stable Dividends

• Management will strive to maintain DPS at current 56 S cents per year, subject to review every six months. OCBC has robust CET-1 CAR of 14.9%, which is the highest among local banks and significantly above its comfort zone of 12.5-13.5%. Implementation of internal ratings-based approach (IRBA) for calculating risk-weighted assets at OCBC Wing Hang is schedule to complete by late-20 or early-21, which will further boost its CET-1 CAR.

Maintain BUY

• We cut our net profit forecast for 2020 by 5.8% due to lower contribution from insurance, lower net trading income and additional specific provisions for exposure to Hin Leong.
• Held up by healthy growth in January and February, we forecast net profit of S$757m for 1Q20, down 38.5% y-o-y and down 39.1% q-o-q.
• Valuation is attractive at 0.8x 2020F P/B and dividend yield at 6.4%.
• Target Price: $9.78

Source: UOB Kay Hian Research - 22 Apr 2020