Improving Conditions, Balance Sheet Can Drive Upside

• OCBC (SGX:O39)’s 2020 profit after tax came in strongly ahead of Street/MKE driven by lower provisions, better NII and a tax write back. The operating environment is improving with momentum set to return to loan growth, while asset quality is better than expected.
• We believe OCBC stands to benefit from North Asian recovery as well as North-South trade flows. Its incoming CEO’s track record in China should also be complementary.
• Strong capital & provisioning buffers could provide upside surprise opportunities for write-backs, special dividends and/or higher payouts going forward, we believe.
• Maintain BUY with higher target price of S$12.74.

Strengthening Operations

• OCBC's management claims customer sentiment is improving. This should support loan demand going forward, we believe.
• We estimate 2020E loans to expand 6% y-o-y (vs. 1% y-o-y in 2020) driven by recovering demand in Greater China, Singapore and rest of world.
• Similarly, fee income should continue to benefit from wealth management inflows (AUM +3% y-o-y in 2020) and recovery in loan fees, brokerage, IB&A and credit cards.
• Concurrently, we expect adjusted credit charges to fall to 34bps in 2021E vs 77bps in 2020. This may come in lower given the orderly exits of loan moratoriums seen so far (moratoriums fell to 2% of loans in Jan 21 vs 4% in Dec 20).

Increased Focus on China?

• Greater China accounted for 31% of OCBC's profit before tax in 2020. Management claims over the long term, this segment should contribute 20-25% profit before tax of a larger pie, while Singapore delivers 50-55%.
• OCBC has a clearly articulated strategy of growing in Greater China, while its growth path in Singapore is less clear. Its incoming CEO has a strong CET1 ratio of 15.2% (where Management’s ideal range in 12.5%-13.5%) also gives it significant capital space to manoeuvre in executing a North Asia strategy, in our view.

Maintain BUY. Raise Target Price to S$12.74

• Following 2020E results, we upgrade OCBC's 2021-22E earnings per share forecast by 2% each. Our multi-stage DDM based target price (COE 8.4%, 3% terminal) has been raised to S$12.74 from S$12.24.
• Maintain BUY on OCBC with upside catalysts from provision in the medium term.

Source: Maybank Kim Eng Research - 24 Feb 2021