Trading, Insurance May Lower PAT Visibility. Downgrade to HOLD

• OCBC Bank (SGX:O39)’s 1Q20 PAT came in materially behind MKE & Street expectations, dragged down by weak insurance.
• In the medium term, its regionally diversified core-banking business should see resilience and potential market share opportunities fuelled by strong liquidity and capital levels.
• But mark-to-market uncertainty in its insurance investment portfolio and trading income may lower earnings visibility compared to the rest of the sector. As a result, we lower our Target Price to SGD9.46 (from SGD10.32); with just 7% upside, downgrade to HOLD.

Relatively Higher Operational Uncertainty

• While OCBC’s core-banking PPOP increased 8% y-o-y, unrealised mark-to-market losses across Great Eastern Holdings (SGX:G07)’s investment portfolio negatively impacted the group.
• While there has been substantial digital migration of insurance sales, current lockdowns in SG & MY may negatively impact bancassurance income, which is mostly sold at branches.
• Typically insurance and trading related revenue contribute around 15% of total. Under current market volatility, visibility from this segment is greatly reduced, in our view. We have lowered 2020-2022E non-interest income by 9-14% to reflect this.

Asset Quality Risks Remain

• Management is guiding for 100-130bps of cumulative credit charges in 2020-2021E. We have increased our assumptions to slightly above management’s lower end guidance, but in a 3-year cycle (as in past crises), our assumptions exceed management’s upper-end view.
• Oil & gas accounts for 5% of OCBC's loan book, with a quarter of exposures to traders. Continued volatility in this segment may drive a notable part of specific provisions in the near term, in our view.

Downgrade to HOLD With New Target Price: SGD9.46

• Uncertainties in insurance, trading and higher credit charges sees us lowering 2020-2022E PAT by 3-11%.
• OCBC has a strong 14.3% CET1, which we estimate will likely remain above management’s comfort level of 13.5% in 2020E. Yet OCBC’s half-yearly progressive dividend policy has the shortest track record, having been introduced only in 4Q19. While the group has the capacity to stick to this policy this year, execution will need to be closely watched.
• We lower our multi-stage DDM (COE 9.7%, 3% terminal) to SGD9.46. With 7% upside, downgrade to HOLD.

Source: Maybank Kim Eng Research - 8 May 2020