OCBC's Provisions Down. But Dividend Yields Constrained

• OCBC (SGX:O39)’s 3Q20 PAT was in-line with MKE and marginally ahead of Street. A better outlook on asset quality should drive provisioning momentum lower in the medium term. Nevertheless, significant macro-risks from uneven economic recoveries regionally may keep NPL risks on the upside and operational improvements on the downside.
• Also, in the near term, dividend caps may prevent any bottom line improvements converting to better yields.
• We raise our OCBC's rolled forward DDM Target Price to S$9.29. HOLD.

Cautious Optimism on Provisions

• OCBC's 3Q20 provisions fell 53% q-o-q led by a 71% fall in GP. This is driven off an improved credit quality outlook following bottom-up portfolio reviews. The re-payment experience from Malaysia following moratorium expiry has been positive (90% of customers have re-started repayments).
• Overall, portfolio loans under pause have dropped to 5% in Oct vs. 10% in Jul. Nevertheless, management remains cautious on asset quality. 42% of 3Q20 provisions were a management overlay.
• Guidance for credit charges and NPLs are unchanged, but management expects them to land closer to the lower end. We have lowered 2021-22E credit charges by 23-38%, but raise 2020E by 22% to reflect uncertainty around moratoriums.

Operational Challenges Remain

• OCBC's management claims visibility is low for real bankable activities in the region given resurgence of COVID, continued lockdowns and travel bans. NIMs are also likely to see pressure given weak policy rates. 3Q20 PPOP fell 5% y-o-y & q-o-q.
• Non-interest income should be a bright spot – especially wealth management – as OCBC leverages its private banking and insurance franchise.
• Opex should be flattish in 2020E from low discretionary spend and government subsidies. But, we expect OCBC's CIR to rise to 44.5% in 2021E (c. 43.3% 2020E) as subsidies expire and business activities ramp up.

Increase OCBC's Target Price to S$9.29. Maintain HOLD

• Lower provisions and improved non-interest income raises our OCBC's 2021-22E PAT by 6-14%. We lower 2020E by -4% for higher provisions and lower NIMs.
• We believe the MAS dividend cap may remain in place for 2021E as a capital preserver. As a result, operational improvements of OCBC may not translate to better yield.
• Our rolled forward multi-stage DDM (9.7% COE, 3% terminal) implies a Target Price of S$9.29. With 8% upside, maintain HOLD on OCBC.

Source: Maybank Kim Eng Research - 5 Nov 2020