• Repayment trends post-moratorium in Malaysia are promising. OCBC guides for credit costs/peak NPLs to be on the lower end of 100-130bp/2.5-3.5%. We expect more NIM pressure in 4Q20F, but this should stabilise in FY21F.
• Upgrade OCBC to ADD with higher Target Price of S$10.13.
• Asset quality visibility and capital above targeted 12.5-13.5% make a case for a resumption of dividends.

Positive Repayment Trends Post-moratorium in Malaysia

• OCBC (SGX:O39)'s 3Q20 net profit was driven by lower-than-expected credit costs as loan moratoriums expire in Malaysia. Group loans under moratorium shrank to 5% (c.$S13.6bn) at end- Oct (end-Jul: 10%/S$26.7bn).
• Repayment trends were encouraging, with over 90% of these loans resuming timely and full repayments. So far, there have been two repayment installments for the consumer and SME books, and one for corporate loans. Risks of non-payment are present given the limited track record so far, but early engagement with customers will provide it warning signs.
• OCBC projects the exit of its loans under moratorium in Singapore (S$8.8bn) and HK (S$1.5bn) to be relatively smooth given active government support (grants, jobs support scheme), but it would keep watch on those in Indonesia (S$1.6bn); 93% of this portfolio is secured, mostly by real estate.

OCBC's NPLs Likely to Peak at Lower End of 2.5-3.5% Range

• In our view, visibility of repayment trends will likely result in credit costs trending on the lower end of OCBC’s guided 100-130bp over FY20-21F, or more granularly, 78bp of impairments in FY20F tapering off to 25bp in FY21F.
• Assuming no write-offs, NPL ratio could rise towards 2.5-3.5% (1.6% currently). Flows into this ratio will likely stem from the exit of the various relief programmes vs. new cases of business failure. However, current repayment trajectory and write-offs should keep this ratio at the lower end of the range.

OCBC's NIMs Should Stabilise Going Into FY21F

• We expect NIMs to remain pressured into FY21F as more loan repricing filters through. OCBC’s strategy is to build on longer-tenured assets and shore up its CASA base to stem further compression; we expect 1.47% in FY21F (FY20F: 1.6%).
• OCBC expects low-to-mid single-digit loan growth in FY21F as key markets continue to be affected by closed borders. Modest growth and contained credit migration (via NPL formation trajectory) should see RWA growing 5% in FY21F, keeping CET1 ratio over 14%. RWA savings of S$7bn from OCBC Wing Hang’s adoption of the IRB approach (likely 1H21F) could push this closer to 15%, above the group’s efficient range of 12.5-13.5%.

Upgrade OCBC to ADD; Capital Build-up Makes a Case for Dividend Resumption

• We upgrade OCBC to ADD, underscored by clearer navigation of asset quality indicators. Our GGM-based Target Price rises to S$10.13 as we cut FY21F credit costs, adjust NIMs and roll-forward to FY21F.
• Resumption of OCBC's dividends to levels prior to Monetary Authority of Singapore's (MAS) dividend cap is a key re-rating catalyst; we expect dividend of S$0.53 for OCBC in FY21F.
• Downside risk: prolonged recession, hindering regional repayment prospects.

CGS-CIMB Research Reports on Singapore Banks 3Q20 Results

• UOB 3Q20 - CGS-CIMB Research 2020-11-04: A Reversal In NIM Trends.
• DBS & OCBC - CGS-CIMB Research 2020-11-05: Earnings Beat From Trading & Impairments.
• UOB - CGS-CIMB Research 2020-11-04: The Worst Could Be Over; Upgrade To ADD.
• DBS - CGS-CIMB Research 2020-11-07: Provisions Taken Up Front; Upgrade To ADD.
• OCBC - CGS-CIMB Research 2020-11-07: Capital Build-Up; Upgrade To ADD.

Source: CGS-CIMB Research - 7 Nov 2020