OCBC - RHB Invest 2016-05-03: Still Seeing Stress in O&G Exposures

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OVERSEA-CHINESE BANKING CORP OCBC O39.SI 

OCBC - Still Seeing Stress in O&G Exposures 

• OCBC’s gross impaired loans (GIL) rose 9% QoQ in 1Q16 on deepening stress from its oil and gas (O&G) book. 
• Still, GIL ratio of 1.04% remains the lowest among peers and the high proportion of performing O&G GIL underscores the bank’s solid asset quality and proactive management of its loan portfolio. 
• But with no positive catalyst for earnings upgrade and lingering asset quality stress, we downgrade our rating to NEUTRAL from BUY, with revised SGD9.50 TP pointing to an 8% upside. 

Outlook. 

• We expect Oversea-Chinese Banking Corporation (OCBC) to remain focused on managing asset quality, particularly its oil and gas (O&G) exposures where the operating environment is still challenging. 
• We see risks credit cost may exceed our forecast of 29bps for 2016. 
• Management believes it can sustain the improvement in net interest margin (NIM) seen in 1Q16, but the recent decline in Singapore short term rates could pressure margins lower. 

Forecasts and investment case. 

• We trimmed our earnings projections slightly after taking into account weaker-than-expected profit from life insurance and fee income. 
• Our GGM-derived TP is lowered to SGD9.50 (from SGD9.60), based on 1.1x revised book value (-1SD historical mean: 1.14x). 
• OCBC’s share price recovered from the low of SGD7.45 in mid-February, to a high of SGD9.45 in mid-April. 

Downside risks 

• Downside risks include a sharper-than-expected rise in GILs resulting in higher-than-expected credit cost, and weaker-than-expected NIM. 
• Upside risks include better-than-expected improvement in asset quality that would see lower-than-expected credit cost, and better-than-expected non-interest income. 

1Q16 results highlights. 

• Net profit declined on lower profits from life insurance and fee income (wealth management, trade-related and investment banking), as well as higher impairment allowances. 
• Key positives were improved NIM and fully loaded common equity tier 1 (CET-1). However, asset quality remained under pressure, with absolute impaired loans up 9% QoQ while loan loss coverage fell 7ppts QoQ.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-03

RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 9.50 Down 9.60