OCBC - DBS Research 2016-02-17: Balancing act

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OVERSEA-CHINESE BANKING CORP OCBC O39.SI 

OCBC - Balancing act 

• 4Q/FY15 earnings were above consensus but in line with our forecasts 
• Total oil & gas exposure at 6% of total loans; bulk of new NPL formation were from this sector 
• Earnings trimmed on slower loan growth; flattish NIM and higher credit costs 
• TP trimmed to S$9.40 after earnings revision 

A cautious 2016, but priced in; BUY. 

• Focus in 2016 would likely hinge on controlling expenses and new originations to contain quality of its assets. 
• Loan growth is expected to be at low single digits while NIM would likely stay flat. 
• Higher credit costs are imputed given the vulnerability of its oil & gas exposure which currently stands at 6% of total loans. 
• Current valuations appear to be unduly punitive on OCBC’s asset quality position, in our view. 
• Maintain BUY. 

Solid non-interest income drivers to sustain earnings growth. 

• Wealth management income may stay muted due to the uncertain market environment but long-term prospects of this business remain attractive. 
• Insurance contribution could be volatile due to interest rate movements. As such, underlying growth in new business embedded value and total weighted sales should be the focus parameters for insurance, and these have been robust. 

Riding on its unappreciated Greater China franchise over the long term. 

• While there are near-term uncertainties on Greater China growth prospects, we believe the market is still under appreciating the OCBC-WHB’s franchise over the longer term. 
• With its enlarged Greater China presence, OCBC’s growth prospects in wealth management, retail & commercial banking and insurance are further enhanced. 
• Active cross-selling for OCBC’s private banking and insurance businesses are key wins. Integration is still ongoing and on track. 

Valuation: 

• Our S$9.40 TP which implies 1.0x FY16F BV is derived from the Gordon Growth Model. 
• The potential reach of its differentiated non-interest income franchise should support valuations. 
• Current share price pressure pushing valuations close to GFC levels are unwarranted, in our view. 
• Maintain BUY. 

Key Risks to Our View: 

A significant upset in asset quality. 

• While we have assumed higher credit cost and NPL ratio in FY16F, a significant deterioration in asset quality related to the oil & gas and commodities segment could pose downside risk to earnings. 

Slower traction in wealth management business. 

• As a growing income contributor, stricter regulatory requirements for private banking clients could slow growth. 
• Additionally, weak and volatile markets could put customers on a risk-off mode, reducing investment activities.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-02-17

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 9.40 Down 10.00