OVERSEA-CHINESE BANKING CORP
OCBC
O39.SI
OCBC - Actively Managing Its Oil & Gas Exposure
- OCBC surprised with 8bps NIM improvement while new NPL formation fell 62% QoQ in 4Q15.
- Reiterate BUY with a lower SGD9.60 TP (from SGD10.70, 23% upside).
- Management’s proactive loan portfolio review would contain the rise in NPLs while capital ratios have caught up with peers, removing concerns over need for fresh equity.
- Our GGM-based TP implies 1.1x FY16F P/BV, just below -1SD of its historical mean.
Asset quality holding up well.
- Oversea-Chinese Banking Corp (OCBC) has SGD12.4bn exposure to the oil & gas sector with 47% in the offshore support services (OSS) segment.
- In FY15, 14% of OSS loans were classified as nonperforming loans (NPL), but little specific provisions are required for now.
- We expect further increase in NPLs this year, but see limited risk of NPL ratio and credit cost rising to global financial crisis (GFC) levels. This is as OCBC is actively working with customers to keep their vessels employed.
- We forecast credit cost of 29bps for 2016 with NPL ratio at 1.15%.
Muted revenue outlook.
- Against an environment of weak investment sentiment and a slowing China economy, management expects loans to grow at a low single-digit in 2016. This, coupled with lower gains from investment securities, in our view, would lead to flattish overall topline.
Risk.
- We believe key risks to share price performance are:
- a sharper-than-expected deterioration in asset quality,
- weaker-than-expected improvement in wealth management income – which is one of management’s key strategies for operating income growth in the face of weak loan demand, and
- lower-than-expected net interest margin (NIM).
FY16F earnings to dip 3%.
- Our FY16F-17F net profit is trimmed by 8-9% after factoring in higher provisions, slower loan growth and smaller NIM improvement now that we expect a more gradual rise in interest rates.
- We expect flat FY16F pre-impairment operating profit (PIOP) on weak revenue growth.
- A 29% increase in provisions would cause earnings to dip.
Singapore Research
RHB Invest
|
http://www.rhbinvest.com.sg/
2016-02-18
RHB Invest
SGX Stock
Analyst Report
9.60
Down
10.90
