Jovi Ho  Published on Mon, Jul 13, 2020 / 2:21 PM GMT+8 / Updated 1 days agoA

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 &ldquo buy&rdquo 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, &ldquo progressive reopening will provide momentum for an economic recovery,&rdquo says Koh. 

That said, the &ldquo strong sequential rebound&rdquo 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. 

&ldquo 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,&rdquo 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&rsquo s investment products and customer footfall, with 22 of its 46 branches closed from Apr 9 to May 4. &ldquo We expect a 14% y-o-y decline in contributions from cards, hampered by curbs on overseas travel,&rdquo notes Koh. 

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

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

&ldquo We expect contribution from [its] insurance business to be higher at S$220m, up 17% y-o-y,&rdquo 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.

Bank is expecting its value of sustainable financing loans in 2020 to be comparable to last year' s commitment of over S$5b, says exec.

 

COVID-19 will not have a long-term impact on OCBC' s sustainable financing ambitions, even as companies' attentions are now diverted to immediate issues as they struggle with the pandemic fallout.

 

Mike Ng, head of structured finance and sustainable finance at OCBC, told The Business Times that the bank is expecting its value of sustainable financing loans in 2020 to be comparable to last year' s commitment of over S$5 billion.

 

OCBC recently announced a new sustainable finance target of S$25 billion by 2025, after it reached its previous goal of S$10 billion by 2022 two years early.

 

The bank has done about 20 sustainable financing loans year to date, which Mr Ng said is " quite a bit further ahead compared to this time last year" . OCBC did more than 20 such loans in 2019.

 

" We have been quite busy despite the current economic situation, which is actually really positive," he shared.

 

Just last month, OCBC topped a Debtwire ranking of mandated lead arrangers for green- and sustainability-linked syndicated and club loans. OCBC was the No 1 arranger of such loans issued by Asia-Pacific (ex-Japan) corporates from the start of January 2018 to June 17, 2020.

 

Mr Ng is optimistic that the bank has a good shot at hitting its " ambitious" new goal, even as many companies - especially small- and medium-sized enterprises - find themselves occupied with the impact of Covid-19.

 

Many companies have already incorporated sustainability into their business models, he said.

 

" In fact, if I look back at the transactions we had done in 2020, a lot of the deals are by repeat customers," he pointed out.

 

" It is increasingly evident that once companies actually embark on the strategy, they tend to continue on this journey, meaning it' s not a fad or a fashionable thing to do."

 

Growing market opportunity

 

Green loans are widely considered a growing market for financial institutions. The estimated size of climate investment opportunities in emerging markets between 2016 and 2030 is about US$23 trillion, according to a report by the International Finance Corporation. In a separate report by DBS and the United Nations' Environment Inquiry, green finance opportunities in Asean were estimated to be at least US$3 trillion.

 

And while the pandemic has caused many businesses to struggle, Mr Ng said that Covid-19 has actually cast a greater spotlight on the issue of sustainability.

 

Beyond the environment, conversation on sustainability has also begun to consider the various social issues that have bubbled to the surface in the pandemic.

 

" When people talk about sustainability, it' s very much focused on climate change," he said. " But I think with Covid-19, generally we get exposed to some of the crack lines in our systems."

 

Among them is the illegal trading of wildlife, which Mr Ng pointed out is believed to have had a role to play in the virus outbreak. As natural habitats get degraded, there will be more contact between animals and people and that could lead to a higher incidence of such pandemics.

 

Globally, concerns of inequality and access to healthcare have also been widely discussed of late. And closer to home the crowded living conditions of migrant workers also came to the fore because of the outbreak, Mr Ng said, as this segment was hit the hardest.

 

" So, I think Covid-19 has got a positive impact as it has actually raised awareness of these issues," Mr Ng noted. " As to how, or whether, we will end up addressing these issues and introducing measures, I think that remains to be seen.

 

" But really, the first step is creating awareness - at least it gets on the radar of the other stakeholders. And I do believe that ultimately, there will be an increasing focus on these issues by the different stakeholders."

 

Segments to target

 

Most of OCBC' s sustainability finance transactions today are in the property sector, said Mr Ng.

 

From a bank' s perspective, green financing for property is " very easy" because there is little ambiguity on whether they are truly green or not.

 

Green buildings in Singapore receive a Building Construction Authority Green Mark certification, and there are equivalents for this in other countries too.

 

These projects also tend to be " bankable" , said Mr Ng, which may not be the case for other projects.

 

He gave the example of a research and development facility for renewables, which might be very green but might not be bankable because the revenue structure and the business model have not yet been proven.

 

Nevertheless, OCBC is casting its nets wide to seize growing opportunities elsewhere. Other sectors it is looking into are renewable energy, infrastructure and transportation.

 

Mr Ng believes that renewable energy will be a key sector going forward, partly because of concerns around climate change.

 

" As an industry, I think renewable energy is a very attractive one because the cost of renewable energy has been falling rapidly due to large-scale deployment around the world," he said.

 

" Technology is constantly improving and renewable energy has become competitive with the traditional fossil fuel plants. So it' s quite likely in the years to come, it will cost more to burn coal than to generate electricity from renewable sources."

 

He added that with funding for coal-fired power plants drying up, countries are looking at renewable energy as an alternative for their economic expansions.

 

Challenges ahead

 

The opportunities in Asia do, however, come with unique challenges.

 

The first hurdle is how to determine whether a project is truly green, Mr Ng explained. A hydro plant can help generate electricity, but communities might have to be displaced and there could be biodiversity loss.

 

Another challenge is the bankability of projects, which is particularly pertinent in the Asean region. As most of the countries are developing nations, their legal and regulatory systems do not offer adequate protection for investors and banks.

 

Furthermore, a lot of projects are in politically sensitive industry segments such as electricity, water, and transportation. Over the lifetime of these long-term projects there may be various changes in governments that could lead to attempts at renegotiating contract structures, he added.

 

In spite of these hurdles, Mr Ng believes that greater focus on sustainability and climate change is inevitable.

 

" I do truly believe that going forward, capital will flow towards the projects that have a positive impact on the environment or that contribute to the achievement of the United Nations' s Sustainable Development Goals," he said.

 

Capital will also shy away from those projects that do not, he added.

 

" I think more broadly, at least from a bank' s perspective, we do believe that sustainable business is good business."