NPL Uncertainty Despite North Asia Bright Spot

• OCBC (SGX:O39)’s 1H20 PAT disappointed Street/MKE on larger than expected provisioning charges. The group has had a number of negative surprises on its O&M exposure in the past and it manifested in the current quarter too. Additionally, around 10% of their loan book is under moratoriums, which may begin to see pressure as these expire in 2H20. NPL risks spilling over to 2021-22 cannot be discounted.
• Separately, operational normalisation may be muted for the group’s ASEAN businesses given the various stages of lockdowns, while North Asia may be a bright spot.
• Dividend caps may keep yields depressed and uncertain in the near term. Maintain HOLD.

Credit Charge Risks on the Upside

• While 6.8% of OCBC’s Singapore loans are on moratorium, it is 48% for Malaysian exposures. Malaysian moratoriums are set to expire in 3Q20. In Singapore’s scheme customers have to opt-in for relief, Malaysian moratoriums are given by default. As a result, cash flows of individual credits are harder to assess at this stage, according to Management. This may create elevated risks of NPLs going forward, in our view.
• Additionally, OCBC took SPs for a specific shipping exposure in 2Q and continue to write down O&M credits. 1H20 credit charges reached 106bps. Its guidance on total credit charges are 100-130bps for 2020- 2021E. However, management claims actuals may come towards the higher end of the range. We have raised allowances for 2020-2022E by 17-36%.

Cautious Growth

• OCBC's 1H20 PPOP fell 5% y-o-y despite a strong contribution from insurance. Management struck a cautious tone on growth with a focus on cost management in the near term. 25% of loans are in North Asia, which may be a bright spot given earlier lifting of lockdowns there. But this may not be enough. 2Q20 loan growth in Greater China was 6% y-o-y whereas Singapore was flat and ASEAN fell 3% for the Group.

Lowering Target Price to SGD9.06. Maintain HOLD

• We have adjusted down dividends expectations in-line with MAS guidelines and have kept absolute payout flat in 2021E, given expectations of a slow regional recovery.
• Our post 1H20 adjustments have lowered 2020-2022E PAT by 1-10%. We have reduced our multi-stage DDM (COE 9.7%, 3% terminal) Target Price to SGD9.06 (from SGD9.46).
• With 3% upside, maintain HOLD.

Source: Maybank Kim Eng Research - 7 Aug 2020