SINGAPORE (Jul 13): Oversea-Chinese Banking Corporation (OCBC) is expected to rebound with 33.9% q-o-q net profit growth in 2Q2020, though the $935 million figure also marks a 23.6% y-o-y fall, notes UOB Kay Hian analyst Jonathan Koh in a note dated July 8. 

As such, Koh is maintaining his “buy” call on the company with a lowered target price of $11.58.

After Covid-19 battered markets here and abroad for the first half of the year, “progressive reopening will provide momentum for an economic recovery,” says Koh. 

That said, the “strong sequential rebound” expected in the coming quarter will be accompanied by muted loan growth of 2.9% y-o-y and 0.5% q-o-q in 2Q2020, affected by the broad slowdown in economic activities. 

“OCBC is expected to disburse $1 billion in government-assisted SME loans by June 2020. However, bookings for residential mortgages have slowed and competition has intensified, resulting in some customers repaying after securing refinancing,” he adds.

Additionally, the synchronised fall of benchmark interest rates has caused significant compression of loan yields. Koh expects net interest margin (NIM) to have collapsed by 11 base points (bp) y-o-y and 8bp q-o-q to 1.68% in 2Q2020. 

The three-month SIBOR (Singapore Interbank Offered Rate) and SOR (Swap Offer Rate) have fallen 44bp and 72bp respectively to 0.56% and 0.20% in 2Q2020, while three-month LIBOR (London Interbank Offered Rate) has fallen by a massive 115bp to 0.30%.

LIBOR interbank rates were previously elevated due to stressed funding market conditions in 1Q2020, notes Koh. US dollar-denominated loans accounted for 24.6% of total loans. 

The circuit breaker period also dealt a blow to the company’s investment products and customer footfall, with 22 of its 46 branches closed from Apr 9 to May 4. “We expect a 14% y-o-y decline in contributions from cards, hampered by curbs on overseas travel,” notes Koh. 

“We expect OCBC to achieve mid-single-digit decline in fees of 6% y-o-y in 2Q2020,” he adds.

Over at insurance the equity market bottomed in the third week of March, notes Koh. Great Eastern Holdings’ investment portfolios are expected to register mark-to-market (MTM) gains, which are reflected in increased contributions from insurance and higher net trading income.

“We expect contribution from [its] insurance business to be higher at S$220m, up 17% y-o-y,” says Koh. OCBC owns 87% of life insurer Great Eastern Holdings.

Net trading income is also expected to be higher at $140 million, nearly double that of the previous quarter at $75 million, boosted by gains from investments for GEH's shareholders' fund.

Koh expects general provisions of $120 million for the company, caused by recalibration of macroeconomic variables due to the recession caused by Covid-19 this year. This comes on the back of the Ministry of Trade and Industry lowering its GDP forecast from a contraction of 1-4% to contraction of 4-7%. 

As at 1.55pm, shares in OCBC are trading 1 cent lower, or 0.11% down, at $9.24.