OCBC opens lower on Q2 profit miss: where next in 2020?

OCBC share price: What’s the latest?

Shares of Singapore’s second most valuable money lender Oversea-Chinese Banking Corp (OCBC) (SGX: O39) opened lower on Friday 07 August 2020, despite posting lower profits for the second quarter of fiscal 2020.

As at 09:10 SGT on Friday, OCBC shares are trading at S$8.70 each on the IG platform – 1.14% lower than the previous day’s closing price.

IG’s market analysis shows that ‘buys’ currently form 60% of all trades on the OCBC counter, while ‘sells’ made up 52% of all trades across the week so far.

Additionally, 97% of client accounts also hold ‘buy’ (long) positions on the stock, indicating an expectation for OCBC’s share price to rise in the immediate term.

As of 30 July 2020, the stock has a 12-month consensus share price target of S$9.36 per share from six analysts, alongside an average rating of ‘buy’ – based on a Refinitiv poll of 19 brokers.

OCBC’s Q2 net profit falls 40% to S$730 million

The bank announced its earnings for the three months ended 30 June 2020 before the market opened on Friday.

It reported a net profit of S$730 million for Q2 2020, 40% lower than that of Q2 2019’s S$1.22 billion. It attributed this decline to ‘significantly higher’ allowances being set aside in anticipation of expected credit losses during the Covid-19 pandemic.

Allowances (or provisions) of S$750 million were made for the June ending quarter, 582% higher than that made in the same period a year ago.

The decline was steeper than Refinitiv survey expectations for a 32% fall to a group profit of S$835 million for the quarter.

Breaking down by income segment, net interest income fell 7% year-on-year to S$1.48 billion as asset growth was more than offset by margin compression. Non-interest income rose 11% to S$1.14 billion, mainly attributable to increased trading and insurance income.

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In terms of asset quality, OCBC’s non-performing loan (NPL) ratio stood at 1.6% for Q2 2020, which is a 0.1% increase from Q2 2019’s 1.5%.

A total of S$4.35 billion was recorded for non-performing assets in the second quarter, 11% higher than the S$3.91 billion recorded during the same period in 2019.

OCBC lowers Q2 dividends by 36% to S$0.159 per share

In line with the Monetary Authority of Singapore’s (MAS) recent guidelines for banks to cap dividends per share (DPS) at 60% of the prior year’s DPS, the group has proposed an interim one-time tax-exempt dividend of S$0.159 per share, which is 36.4% lower than the amount of S$0.25 paid a year prior.

The interim dividend will amount to an estimated S$700 million in total payout – down from 2019’s S$1.08 billion. This represents a dividend payout ratio of approximately 49% of the group’s net profit after tax of S$1.43 billion for the first half of 2020, 2% higher than FY2019’s 47%.

Under the guideline, the maximum DPS that OCBC can declare for FY2020 would be S$0.318, against FY 2019’s total DPS of S$0.53.

MAS had also advised banks to give shareholders the option to receive their DPS in scrip, which means via alternative forms of credit such as shares.

As such, the Scrip Dividend Scheme will be applicable to the interim dividend, giving shareholders the option to receive the dividend in the form of shares, with the issue price of the shares set at a 10% discount to the daily volume weighted average share prices between 21 August 2020 (the ex-dividend date) and 24 August 2020.

OCBC forecasts that loan growth will remain flat

Looking ahead, the group says its expectations for the rest of the 2020 financial year remains cautionary, as it is ‘mindful’ of new waves of Covid-19 infections.

OCBC stated in its Q2 earnings presentation that while there are some early signs of improvement in business activities, these are ‘neither strong nor systemic’ as the risk appetite in the real economy are still ‘low’.

As such, the bank said it will continue to take a ‘disciplined’ approach in cost management by targeting further quarterly reduction in expenses and capping discretionary spending, among other cost efficiency measures.

In terms of specific guidance, OCBC expects full-year net interest margin in the mid-to-high range of 1.5%, with loan growth expected to remain ‘flat’ throughout the rest of the financial year.

On the credit front, the group says it will aim to maintain a credit cost estimate of 100 basis points (bps) to 130 bps for 2020 to 2021.

A gross non-performing loan ratio of between 2.5% and 3.5% is also projected, after factoring in the withdrawal of government sponsored relief programmes.

Samuel Tsien, OCBC’s Group CEO, said: ‘Despite the turmoil since the start of the COVID-19 pandemic, we have stayed focused on our corporate strategy to drive long-term sustainable value. We must also look beyond this pandemic to capture opportunities presented by prevailing economic trends to emerge stronger and relevant in a postpandemic world.’

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