• OCBC (SGX:O39)'s 4Q20 net profit of S$1.13bn (+10% q-o-q, -9% y-o-y) beat our/consensus estimates by 13%/33%. The beat was mainly due to much lower taxes.
• Group loans under moratorium reduced to 2% in Jan 21 (from 9% in Sep 20).
• Final dividend of S$0.159 (scrip) per share was declared as bound by MAS’s cap, bringing OCBC's FY20 dividend to S$0.318 per share.
• Reiterate ADD and target price of S$12.52, based on GGM.

OCBC's 4Q20 Core Operating Performance in Line With Our Expectations

• The beat was mainly due to one-off positive tax impact arising from finalisation of prior years’ tax assessments at Great Eastern Holdings (SGX:G07).
• OCBC's 4Q20 profit before tax of S$1.1bn was in line with our estimate. FY20 net profit formed 108%/109% of our/consensus forecasts.
• OCBC declared final dividend of S$0.159 (with scrip) per share for 4Q20, bringing FY20 dividend to S$0.318 per share (as bound by MAS’s dividend cap at 60% of FY19’s payout).

+2bp NIM Beat Market’s Expectations of a Compression

• OCBC's 4Q20 NIM rose 2bp q-o-q to 1.56% (3Q20: 1.54%) – beating market expectations of a compression; we expected 1.52%. As a result, full-year FY20 NIM narrowed 16bp y-o-y to 1.61% (FY19: 1.77%).
• 4Q20 LDR decreased to 83.7% (3Q20: 86.2%) as loans contracted 0.7% while deposits rose 2.4% q-o-q. CASA ratio rose further to 60.3% in 4Q20 (FY19: 48.4%).
• Fee income improved slightly (+3% q-o-q, -7% y-o-y) as wealth management fees stayed healthy at S$250m (-1% q-o-q, -8% y-o-y). Other fee income drivers held steady q-o-q. Treasury income dipped slightly to S$301m (-4% q-o-q, -24% y-o-y).
• Opex was well controlled (flattish q-o-q). CTI stood stable at 45.3% in 4Q20 (3Q20: 43.3%) due to the 2% q-o-q dip in total income.
• On balance, PPOP slid 6% q-o-q (-18% y-o-y) as weaker insurance income (-26% q-o-q, - 23% y-o-y) offset the better NII.
• OCBC set aside impairment provisions of S$285m in 4Q20 (43bp of (calculated) credit costs, comprising 35bp loan SPs and 7bp GPs (difference due to rounding)). Full-year credit costs came up to S$2.0bn or 77bp – which was within management’s guidance of 100-130bp (S$2.8bn-3.5bn) over FY20-21F.
• Great Eastern Holdings recorded stronger q-o-q total weighted new sales (TWNS) of S$528m (+22% q-o-q, +34% y-o-y) and improved new business embedded value (NBEV) of S$275m (+72% q-o-q, +42% y-o-y).
• 4Q20 CET-1: 15.2% (3Q20: 14.4%).
• 4Q20 ROE 9.3%, FY20 ROE: 7.6% (FY19: 11.4%).
• Summary of key statistics available in report attached below.

OCBC 2021 Outlook: Uncertainties Persist

• OCBC expects NIM to come in cliff effect from exit of moratoriums. Group loans under moratorium decreased to 2% in Jan 21 (from 9% in Sep 20).
• We see positive impact to OCBC's share price given the earnings beat and better-than-expected NIM performance.
• Downside risk: NPL accretion.

Source: CGS-CIMB Research - 24 Feb 2021