• OCBC has buffed up its management overlays to ~S$600m as a pre-emptive move against any deterioration in its Malaysia and Indonesia moratorium portfolios. Its 16.1% CET1 ratio is a key offence and defence tool – whether in hiking FY21F dividend, for an EPS-accretive acquisition, or to guard against NPLs.
• Reiterate ADD on OCBC. Gradual economic recovery should support fee income levels.

2Q21: Higher Credit Costs, But Stronger NIMs Too

• OCBC (SGX:O39)’s net profit of S$1.16bn (-23% q-o-q, +47% y-o-y) was relatively decent given the combination of exceptionally strong wealth, insurance, and treasury income in 1Q21. At the total income level, non-II was understandably weaker given more moderate customer activity and lower MTM gains from Great Eastern (SGX:G07).
• A 2bp q-o-q rise NIMs to 1.58% was a positive surprise, but NII was flattish given the modest loan growth of +1.4% q-o-q in 2Q21. Loan loss provisions were slightly higher than our expectations at 34bp in 2Q21 as OCBC topped up its general provision (GP) buffers in anticipation of potential credit quality deterioration. Read also OCBC & UOB Earnings Highlights - CGS-CIMB Research 2021-08-04: A Decent Showing; Dividends Reinstated.
• 1H21 made up 54% of both our and consensus’ FY21F estimates.

Keeping Watch on Malaysia and Indonesia

• OCBC's management has a more cautious asset quality outlook given the resurgence of COVID-19 cases and consequent lockdowns in Malaysia and Indonesia – the additional shrank to S$4.5bn in 2Q21 (1Q21: S$5.1bn) or 2% of group loans, and were 90% secured.

Earnings Accretion and RLAR Reclassification Pushed CET1 Higher

• Continued earnings accretion and a relatively lower dividend payout moratorium concerns in FY20, its management overlay buffer, lack of M&A target and robust income streams across banking, wealth, and insurance.

Reiterate ADD on OCBC With GGM-based Target Price of S$13.75

• We see OCBC’s excess capital of ~S$6bn above its ~13.5% efficient CET1 ratio as a catalyst for the stock, whether in terms of a higher return to investors or accretive M&A.

• Re-rating catalysts are Fed rate hikes.
• Sustained lockdowns are a downside risk.

Source: CGS-CIMB Research - 4 Aug 2021