OCBC - RHB Invest 2015-10-29: Proactive Restructuring Of Oil & Gas Loans

OVERSEA-CHINESE BANKING CORP OCBC O39.SI

OCBC - Proactive Restructuring Of Oil & Gas Loans

3Q15 core net profit fell 14% QoQ mainly on lower non-interest income and higher provisions.
Maintain BUY, with a lower TP of SGD10.70 (from SGD10.90, 16% upside).
Our TP implies a FY16F P/BV of 1.25x vs the historical mean of 1.35x.
OCBC’s asset quality remains resilient despite the sharp 28% QoQ rise in NPLs.
Proactive restructuring of oil & gas loans would help keep its credit cost in check.

OCBC posted core net profit of SGD902m (-14% QoQ/+7% YoY) for 3Q15 and SGD2,943m for 9M15 (+11% YoY). 9M15 earnings were at 78% of consensus’ 2015 forecast of SGD3,786m. The sequential drop in earnings was mainly due to lower non-interest income (-17% QoQ) and higher impairment charges (+68% QoQ).

stable net interest margin (NIM) of 1.66% as the drop in asset yields was compensated by lower funding costs,
operating expenses were well-controlled (-2% QoQ),
deposits grew 2% QoQ with demand deposits up 8% QoQ, and iv) fully-loaded Common Equity Tier 1 (CET1) ratio strengthened further to 11.4% (June: 11.2%, Dec 2014: 10.6%).

The negatives were:
1. a sharp 28% QoQ rise in gross non-performing loans (NPLs) that led to a higher credit cost of 33bps (2Q15: 20bps) and lower loan loss coverage (LLC) of 125.8% (June: 156.4%), and
2. still-weak loan demand. Gross loans were up 1% QoQ, but stayed flat on constant currency terms.

The spike in NPLs was largely due to proactive action to restructure accounts in the oil & gas support services sector, given the prolonged slump in oil prices. OCBC is seeing almost zero NPLs in its commodity exposure while its China NPL ratio is a low 0.3%.

Although loan growth would be softer than expected, management expects OCBC’s underlying operations to be supported by growth in its wealth management business. It believes NIM can be sustained at 3Q15 levels while credit cost would likely be maintained at current levels.
We lower our GGM-based TP to SGD10.70 (from SGD10.90) after fine-tuning of our ROE forecasts, implying a 1.25x FY16F P/BV (historical mean: 1.35x).
Maintain BUY, as pre-emptive restructuring of oil & gas loans would help keep credit costs in check.
OCBC’s gross NPL ratio of 0.88% remains the lowest among peers, while its LLC is at a comfortable level.

Singapore Research RHB Research | http://www.rhbinvest.com.sg/ 2015-10-29

RHB Research SGX Stock Analyst Report BUY Maintain BUY 10.70 Down 10.90