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Oversea-Chinese Banking Corp - UOB Kay Hian 2015-10-29: 3Q15 ~ Scare From Asset Quality Deterioration

Oversea-Chinese Banking Corp - UOB Kay Hian 2015-10-29: 3Q15 ~ Scare From Asset Quality Deterioration OVERSEA-CHINESE BANKING CORP OCBC O39.SI 

Oversea-Chinese Banking Corp (OCBC SP) 3Q15: Scare From Asset Quality Deterioration 

  • Rescheduling of loans extended to the O&G sector, resulting in deterioration in NPL ratio by 0.2ppt qoq to 0.9%. 
  • OCBC is conservatively managed and has the lowest NPL ratio. A rebound in NPLs and credit costs to more normalised levels was unavoidable. 
  • We expect absolute NPLs to increase by another 39.2% and NPL ratio to peak at 1.2% in 2Q16. 
  • The pressure on Malaysia, Indonesia and Greater China would climax in 1H16 due to a hike in US interest rates and asset quality should stabilise thereafter. 
  • Maintain BUY with a lower target price of S$11.25. 

RESULTS 

  • Oversea-Chinese Banking Corp’s (OCBC) 3Q15 net profit of S$902m was below our forecast of S$942m but close to consensus estimate of S$912m, a respectable set of results given the multiple headwinds. 

Slight margin compression. 

  • The narrower NIM at 1.66%, down 1bp qoq, was understandable due to poor performance in money market gapping in Singapore. There was also downward pressure on NIM due to a lower loan-to-deposit ratio. 

Hits from volatility in financial markets. 

  • Volatility in financial markets has caused unrealised mark-to-market losses at Great Eastern Life. Contribution from life insurance was only S$62m compared with S$174m last year. OCBC also incurred a specific provision of S$35m for investment in equity securities. 

Hurt by asset quality deterioration. 

  • NPLs increased 27.5% or S$402m qoq due to exposure to oil & gas (O&G) support services relating to charter for rigs and support vessels. These loans were booked in Singapore but credit risk resides in Malaysia and Indonesia as well. The loans were rescheduled, and being restructured loans they were classified as NPLs. The bulk of the increase (estimated at about 80%) was driven by loans that were not overdue. NPL ratio has deteriorated by 0.2ppt qoq to 0.9% but remains low compared with peers. 

OCBC has reduced exposure to O&G from 7% to 6% of total loans in 3Q15. 


Continued good performance from the treasury team. 

  • Net trading income was much higher at S$196m due to customer flows for treasury activities. 


STOCK IMPACT 

  • OCBC managed to achieve a respectable set of results with net profit above S$900m for 3Q15 despite the tough operating environment. 


ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING 

  • Management has cut guidance for loan growth from mid to low single-digit for 2015. 

Cautious on Malaysia. 

  • OCBC has turned more cautious on lending in Malaysia. It is selective in lending to government-linked companies, especially those under the state government and not aligned with the federal government. Management will focus on expansion in Eastern Malaysia, where some foreign banks have exited the market. 
  • OCBC will reposition some existing branches and add new branches. Management does not have an appetite for expansion in loans but wants to be prepared for future recovery. 

Growth from Indonesia. 

  • Loan growth was robust in Indonesia at 11.3% qoq and 21% yoy, driven by Food & Beverage and Tobacco industries. OCBC NISP has expanded beyond its core SME business franchise to consumer and corporate banking. Many large corporations are already banking with OCBC NISP. 
  • Management expects to see low double-digit loan growth going forward. Management sees improvement in fundamentals with the Jokowi Administration becoming more efficient after the recent cabinet reshuffle. The two coordinating ministers are pushing for more government projects. 

Exposure to commodities. 

  • Exposure to the commodities sector remains unchanged at 7% of total loans, encompassing the entire value chain from plantation, trading and processing. For trade finance, OCBC is focusing on financing the movement of goods rather than the storage of goods. Thus, it is not affected by the fluctuation in commodity prices. Absolute NPLs for commodities is less than S$100m and NPL ratio is significantly below 1%. 

Asset quality for housing loans holding up. 

  • Volume of new origination for housing loans has dropped significantly. The proportion of housing loans for owner occupation is 70%. The average loan-to-value (LTV) ratio is 65% (group basis). NPL ratio for housing loans is very low at 0.5%. 
  • OCBC has experienced minimal amount of foreclosure. The exposure to Singaporeans buying properties overseas is less than S$1b. 


EARNINGS REVISION/RISK 

  • We have cut our net profit forecasts by 2.2% for 2015 and by 5.7% for 2016 due to: 
    1. We estimated loan growth at 2.5% for 2015 (previous: 3.1%) and 6% for 2016 (previous: 8.2%). 
    2. We expect absolute NPLs to increase by another 39.2% and NPL ratio to peak at 1.2% in 2Q16. 
  • We expect credit costs to increase to 22.8 bp for 2016, compared with previous expectations of 16.8 bp. 


VALUATION/RECOMMENDATION 


 Maintain BUY. 

  • Our target price of S$11.25 is based on P/B of 1.44x, derived from Gordon Growth Model (ROE: 11%, COE: 7.8% and Growth: 0.5%). 


SHARE PRICE CATALYST 

  • Growth from regional markets in Malaysia, Indonesia and China. 
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia. 


Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-29
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.25 Down 12.66


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