• We seek to temper investors’ 2Q21F earnings hopes given tamer financial markets (wealth, trading) and business volumes (movement restrictions).
• Management’s tone on asset quality is key to forming full-year credit cost expectations, capital management plans, and correspondingly, dividends.
• Reiterate ADD call on OCBC. We think investors have started looking past credit cost concerns to price in regional border re-openings and Fed rate hikes.

We Expect Some Normalisation in OCBC's Earnings From a Stellar 1Q21

• As we draw closer to Singapore banks’ 2Q21F earnings announcements in Aug 21, we seek to temper investors’ expectations given the exceptional 1Q21 revenue trends.
• To recap, 1Q21 earnings were boosted by very strong treasury income from large customer flow volumes amid a steepening yield curve, elevated wealth management income on the back of risk-on sentiment, a rebound in loan growth, and stabilisation of asset quality.
• We think it would be a feat to repeat another record quarter given tamer financial markets and pencil in more modest earnings. Furthermore, the extension of movement restriction orders in Singapore and the rest of the region in 2Q21F could see management turning more cautious on asset quality ahead. On this end, we push our expectations on impairment write-backs (~S$400m in management overlays) to FY22F.

Deposit Management and Stable Rates Should Sustain NIMs

• We expect OCBC (SGX:O39) to record a 2Q21F net profit of S$1.15bn (-23% q-o-q, +46% y-o-y).
• While growth momentum is picking up – particularly corporate loans – this should be more apparent in 2H21F as OCBC redeploys sheet optimisation (deposit pricing management, shedding of fixed deposits) and steady benchmark rates.

Weaker Wealth and Trading Income May Weigh on Net Profit

• Softer non-II (-18% q-o-q, +6% y-o-y) accounts for our expectations of a q-o-q tumble in OCBC's net time, we expect some normalisation in OCBC's wealth management and treasury income in 2Q21F on the back of movements.

Reiterate ADD With Unchanged GGM-based Target Price

• While we think that it may be too early for capital management strategy and correspondingly, dividends.
• We expect dividend of S$0.25 from OCBC in 1H21F on the basis of the MAS lifting its dividend cap on banks.

• Downside risks are weaker repayments from loans post-moratoriums.

Source: CGS-CIMB Research - 5 Jul 2021