OVERSEA-CHINESE BANKING CORP
OCBC
O39.SI
Oversea-Chinese Banking Corp (OCBC SP) - 1Q16: Results Meet Expectations; Resilient And Well Capitalised
- OCBC met expectations despite weakness in non-interest income from fee income and insurance.
- Having already recognised NPLs of S$895m for the O&G sector, chances of investors being blindsided by further chunky NPLs from exposure to the O&G sector are much lower.
- Maintain BUY with a higher target price of S$10.98.
RESULTS
- OCBC reported net profit of S$856m (-0.5% qoq, -13.8% yoy), which is in line with our forecast of S$860m and consensus estimate of S$879m.
• Contraction in trade loans affected loan growth.
- Loans contracted 1.2% qoq and 1% yoy. US dollar-denominated loans declined 7.8% qoq and 13.8% yoy due to reduced demand for trade loans.
- Net interest income grew 4.6% yoy due to NIM expansion of 1bp qoq and 13bp yoy. Loan yield has improved in Singapore and Indonesia.
• Weakness from non-interest income.
- Fees declined 7% qoq and 5.3% yoy. With the exception of fund management (17.2% yoy) and service charges (44.4% yoy), most other sources of fees suffered contractions on a yoy basis.
- The hit on wealth management (- 15.5% yoy) was particularly severe due to risk aversion and volatility in financial markets.
- Bank of Singapore’s AUM has increased by US$2b qoq to US$57b.
• Insurance hard hit by market volatility.
- Contributions from insurance business were reduced by 48.5% yoy.
- Great Eastern was affected by higher claims in its non- participating funds, widening of credit spreads and correction in the equity market.
• Net trading income was healthy at S$122m.
- OCBC also recognised gains of S$59m from investment securities and S$21m from disposal of properties.
• Volatility in prices of crude oil created more stress.
- NPLs increased S$185m or 9.4% qoq due to higher NPLs in Singapore and Indonesia, mainly from the Oil & Gas (O&G) sector. Thus, NPL ratio edged up slightly from 0.9% to 1.0%. Specific provisions have increased to S$99m (4Q15: 74m, 1Q15: S$45m).
- OCBC has set aside general provisions of S$56m despite the contraction in its loan book.
- OCBC’s fully loaded CET-1 CAR has improved by 0.6ppt qoq to a robust 12.4%.
STOCK IMPACT
• Calamity averted.
- Stresses on the O&G portfolio mounted as prices of crude oil plunged in 1Q16.
- The pressure on asset quality should ease given that prices of crude oil have recovered and sustained above US$40/bbl.
- We are cautiously optimistic that the worst could be over for banks’ exposure to the O&G sector.
• Transparency in managing exposure to O&G.
- We like OCBC for its conservative and realistic management of exposure to the O&G sector. Management approaches customers in the offshore support services segment to re-negotiate lending terms to ensure that vessels continue to be chartered and deployed.
- Having already recognised NPLs of S$895m for the O&G sector, chances of investors being blindsided by further chunky NPLs from exposure to the O&G sector are much lower.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
• Exposure to the O&G sector.
- The size of OCBC's exposure to the O&G sector was relatively unchanged at S$12.4b or 6% of total loans. The offshore support services segment accounted for 45% of the O&G portfolio, of which 15% is classified as NPLs.
- We estimate that NPLs for the O&G sector have increased from S$822m to S$895m, up 8.9% qoq. Management disclosed that 58% of these NPLs are still current in interest and principal repayment while 3% are paying interest only. The balance of 39% has defaulted on both interest and principal repayment.
- The stress in the offshore support services segment deepened as prices of crude oil plunged in 1Q16. Charterers, who are typically global or state-owned companies, renegotiated for lower charter rates and loans were accordingly restructured and classified as NPLs.
- A few large corporate accounts have been classified as new NPLs. Management highlighted that customers are seeing more demand for long-term charters of 3-5 years, which we view as a positive sign.
- The O&G sector accounted for an estimated 41.6% of OCBC’s NPLs. Excluding the O&G sector, OCBC’s NPL ratio would only be 0.6%.
• Exposure to the commodity sector.
- The size of OCBC's exposure to the commodity sector is also relatively unchanged at S$11.9b or 5.7% of total loans. The portfolio comprises of plantation 47%, trading 19% and mining, processing & refining 34%.
- NPL ratio for the commodity sector is low at 0.1%.
• Pricing disciplined and rational.
- The expansion in NIM came mainly from improved yield from customer loans. Management observed that the industry has become more disciplined in pricing of loans to reflect risk profile of borrowers.
• Reduction in trade loans affected demand for US dollar-denominated loans.
- Trade loans have fallen by an estimated 53.4% yoy. The demand for US dollar-denominated trade finance facilities was reduced significantly due to:
- Chinese customers are borrowing on-shore as the interest rate differential has narrowed or even reversed, and
- The severe drop in prices of commodities has also affected the volume of trade loans.
- According to management, Greater China accounted for only one-third of its overall trade finance business.
• Expect NIM to stabilise in Indonesia.
- Management expects the net spread/margin for Indonesia to be maintained. The financial services authority OJK has imposed caps on lending rates but will also correspondingly put ceilings on deposit rates. Management expects NIM to eventually stabilise at 4.0-4.3%.
- OKJ is also pushing for growth in micro loans.
- Management will approach the new business cautiously and conservatively. It will develop its platform for micro loans and slowly grow the new business.
• Boost from associate Bank of Ningbo.
- Contribution from Bank of Ningbo (BON) has increased 19% qoq. BON focuses on corporate lending in the vicinity of Ningbo. It has also successfully expanded into consumer lending to civil servants in China. BON has healthy asset quality with NPL ratio at only 1%.
EARNINGS REVISION/RISK
- We have reduced our 2016 and 2017 net profit forecasts by 1.1% each to S$3,486m and S$3,608m, respectively.
- We anticipate that NIM could recede slightly to 1.72% in subsequently given the huge correction in SOR and slight moderation in SIBOR.
VALUATION/RECOMMENDATION
- Maintain BUY. OCBC trades at 2016F P/B of 1.02x (GFC trough: 0.83x). The stock provides an attractive dividend yield of 4.1%.
- Our target price of S$10.98 is based on 1.27x P/B, which is derived from the Gordon Growth Model (ROE: 9.7%, COE: 7.8% (Beta: 1.0x) and Growth: 0.8%).
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
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http://research.uobkayhian.com/
2016-05-03
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