• Higher-than-expected credit cost of 97bp resulted in OCBC missing expectations in 2Q20. Net profit of S$730m was below our S$847m estimate.
• Guidance: credit cost similar to peers at 100-130bp for 2020-21F, NPL of 2.5- 3.5% (2Q20: 1.6%), FY20F NIM of mid-to-high 1.5% and flat y-o-y loan growth.
• OCBC's interim DPS was 15.9 Scts in 1H20 (1H19: 25 Scts).
• OCBC's share price could be weaker than peers’ due to the results miss.

Missed on Credit Costs

• OCBC (SGX:O39)’s 2Q20 net profit of S$730m (+5% q-o-q, -40% y-o-y) was 14%/24% below our/consensus estimated S$847m/S$958m. 1H20 net profit formed 38%/40% of our/consensus forecasts.
• OCBC declared an interim dividend of 15.9 Scts in 1H20 (1H19: 25 Scts), with an option for scrip. This represents half of the maximum S$31.8 Scts DPS that may be paid out in FY20F under the Monetary Authority of Singapore’s (MAS) guideline for banks to cap dividends at 60% of FY19’s DPS.
• The lower-than-expected net profit came mainly from heftier impairments of S$750m (vs. our expected S$450m). Reported credit cost was 97bp in 2Q20 (1Q20: 86bp). Specific provisions (SPs) rose to 66bp (1Q20: 36bp); 31bp were general provisions (GPs) (1Q20: 50bp). Most of the SPs were due to a write-down of offshore support vessels (OSVs) in view of the poor outlook for the sector.

Highlights of OCBC's 2Q20 Results

• OCBC's 2Q20 NIM fell 16bp q-o-q to 1.60% (1Q20: 1.76%), in line with our expectations; NII dipped 9% q-o-q and 7% y-o-y. Trading income rebounded strongly to S$325m (1Q20: S$18m), offsetting fee income weakness (-19% q-o-q, -16% y-o-y).
• Wealth income was slightly softer q-o-q at S$264m in 2Q20 (-9% q-o-q, +1% y-o-y) while card income remained subdued. PPOP of S$1.5bn (+10% q-o-q, +4% y-o-y) was 12% ahead of our estimate.

OCBC's CEO Guidance

• Credit cost guidance was maintained at 100-130bp over FY20-21F. OCBC's CEO also guided for NPL ratio of 2.5-3.5%, full-year NIM of mid-to-high 1.5% range and flat loan growth.

Key Trends

• On non-interest income, wealth income of S$264m was slightly weaker than 1Q20’s S$291m. AUM under Bank of Singapore rose to S$113bn from S$104bn in 1Q20.
• 2Q20 LDR was stable at 85.1% (FY19: 86.5%) as deposits and loans dipped 1%.
• Insurance income rose 80% q-o-q to S$282m on the back of stronger contributions from Great Eastern Holdings (SGX:G07). Great Eastern Holdings recorded weaker q-o-q total weighted new sales and new business embedded value but this was more than offset by a rise in profit from shareholders’ funds to S$85.3m in 2Q20 (1Q20: -S$41.9m) on the back of higher MTM gains.
• Opex was flattish - CTI improved to 42.2% in 2Q20 (1Q20: 44.5%).

Source: CGS-CIMB Research - 7 Aug 2020