Oversea-Chinese Banking Corp Ltd - Better credit outlook9 Nov 2020
- 3Q20 earnings dropped 12% YoY but improved 41% QoQ to S$1,028mn as allowances halved from previous quarter.
- Fees and commissions were down 9% YoY but recovered to normalised FY19 level of S$500mn per quarter.
- Allowances of S$350mn were only 8% higher YoY despite generally high credit costs. SP dived to S$148mn from S$271mn a year ago.
- Loans under moratorium shrank from 10% to 5% of loan book, reducing risks of NPA formation in FY21.
- Maintain ACCUMULATE with higher GGM TP of S$9.68, from S$8.92 previously. We now peg our TP at 0.92x P/BV and FY21e ROE of 8.6% to reflect a better credit outlook. For sector exposure, still prefer UOB (SGX: U11, Accumulate, TP: S$21.10).
+ Non-interest income grew 6% YoY
Life and general insurance income grew another 29% YoY while trading income increased S$255mn YoY. WM fees recovered from their low of S$205mn in 2Q20 to S$252mn. This lifted fees and commissions to S$501mn, comparable to their quarterly run rate in FY19.
+ Allowances halved from a quarter ago
Total allowances of S$350mn were made up of S$148mn in SP and S$202mn in GP. This brought credit cost to 67bps, down from a front-loaded 87bps in 1H20. Total reserves of S$4,618mn provided for NPA coverage of 109%, an increase of 101% QoQ. Guided credit cost of 50-60bps for FY20 seems reasonable.
– NII fell 11% YoY on a 23bp NIM compression
NIM fell from 1.77% to 1.54% YoY and by 6bps QoQ. It is likely to stabilise at such levels given liquidity conditions and low interest rates are likely to persist.
Loans under moratorium shrank from 10% of loan book to 5%
Despite stabilising economic conditions, the bank believes recovery will be slow. It expects NPL ratio to come in at the lower end of the 2.5-3.5% range it guided previously. The bank’s heavy provisioning in the first three quarters is likely sufficient to see it through FY21.
Maintain ACCUMULATE with higher target price of S$9.68, up from S$8.92
We hold our estimates for FY20e/FY21e and peg our valuation at 0.92x FY21e P/BV and an 8.6% ROE as allowances start to taper off.