OCBC's credit costs to recede after Q1 ‘front-load'

The bank expects to record 100-130bp in cumulative credit costs.

OCBC is expecting to post 100-130bp in cumulative credit costs over FY2020 to 2021, with the bulk of impairments to turn up after government-led moratoriums and regional relief measures dwinde at end-2020, according to a CGS-CIMB report.

The bank had preemptively inputted management overlays in anticipation of rising NPLs in the coming quarters. These credit costs have been front-loaded in Q1 2020 (86bp) given management’s hefty overlay (50bp GP) which should push impairments lower QoQ this year, analyst Andrea Choong said.

The classification of an O&G trader as impaired was the main reason for the elevated SPs of 36bp and the increase in non-performing assets (NPA) ratio to 1.5% in Q1, the report noted. In addition, management sees broad-based asset quality pressures beyond just the first-order impact, with a forecast of 60/50bp credit costs in this year and in 2021.

The bank recorded market-to-market (MTM) losses and lower trading gains of $18m in the quarter, down -94% QoQ and YoY. Fee income (-2% QoQ, 10%YoY) was quite robust than expected due to strong wealth management fees (7% QoQ, 22% YoY) on large volumes.

Q1 net interest margin (NIM) was resilient at 1.76%, with a guide for full-year FY2020 margins to narrow slightly below 1.7% as the 20 March US Fed rate cuts filter through, the report said. NIM as of the end of the quarter stood at a relatively durable.1.74% given the fall in benchmark rates.

Larger current account savings account (CASA) balances, as well as a shift to shorter tenure and fixed rate loans should balance some margin pressure going forward, the report concluded.