• OCBC (SGX:O39)’s 1H20 net profit is at 46% and 40% of our pre-results and Street’s FY20F. With 2H20’s NIM to remain squeezed and asset quality uncertainties ahead, share price upside is capped.
• OCBC is our preference among the three banks, given its strong CET1 capital adequacy ratio (CAR) and high 25% Greater China loan share – as economic recovery there shows promise.

1H20 Net Profit Sank 42% Y-o-y, Weak Earnings Seen Ahead

• OCBC's 1H20 total income fell 3% y-o-y, mainly on net trading income contracting 28% y-o-y. 1H20 NII was flat y-o-y, but the 9% 2Q20 sequential decline suggests continued weakness in 2H20. We cut our FY20F NII by 3% on a lower NIM assumption.

Sharp NIM Compression

• OCBC 2Q20’s 1.6% NIM was 16bps narrower q-o-q. Reduced asset yields in a low interest rate environment outpaced the fall in funding costs. Management guided FY20 NIM will be at mid-to-high 1.5% range, with our forecast at 1.59% (cut from 1.67%). We assume 1.8% FY20 loan growth – consistent with Management’s flat loan growth guidance.

Wealth Management Remains a Bright Spot

• 2Q20 wealth management income rose 30% q-o-q and 20% y-o-y. Bank of Singapore’s assets under management or AUM rose 8% sequentially to USD113bn.

OCBC Guided for 100-130bps Credit Costs Cumulatively Over Two Years

• NPL ratio was 1.6%, vs 1Q20‘s 1.5%. We forecast cumulative 2- year provisions of SGD3.5bn (~130bps), quite evenly distributed over the two years. Management guided for a future 2.5-3.5% NPL ratio, after imputing the withdrawal of government relief programs. We forecast a 2.4% Dec 2021 NPL ratio, after the 2Q-3Q21 peak.

Capital Remains Adequate

• OCBC’s 14.2% CET1 CAR (highest among the three banks), is marginally lower than 1Q20’s 14.3%.
• OCBC declared a 15.9 cents 1H20 dividend per share – the scrip dividend scheme will apply, with a 10% discount. The lower dividend (vs 1H19’s SGD0.25) is in accordance with the Monetary Authority of Singapore’s guidance to moderate banks’ 2020 dividends. We forecast FY20 DPS at 31.8 cents. In the absence of regulatory guidelines, we assume a FY21F dividend per share of 36 cents.

Our Target 2020F P/NBV Is 0.81x

• Our target 2020F P/NBV is 0.81x, about 2SD below the 1.12x 5-year average. Asset quality uncertainties make it unlikely for OCBC to revert to its historical average P/NBV in the near term.
• NEUTRAL, GGM-derived SGD8.70 Target Price, 0% downside and 4% yield based on 0.81x 2020F P/NBV derived from our 8.3% sustainable ROE assumption (1H20: 6.1%).

Source: RHB Invest Research - 11 Aug 2020