OCBC Bank (OCBC SP) - Maybank Kim Eng 2016-10-28: Headwinds ahead

OCBC Bank (OCBC SP) - Maybank Kim Eng 2016-10-28: Headwinds ahead OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - Headwinds ahead


Weak underlying trends 

  • 9M16 core PATMI of SGD2,684m (-9% YoY) was in line with our expectation. 
  • 3Q16 core PATMI of SGD943m (+5% YoY) lifted by 25% YoY increase in non-interest income, mainly due to higher wealth management fees and GEH’s profit from life assurance. 
  • 3Q results reflected weak underlying trends: 
    1. net interest income -6% YoY; 
    2. NIM compression by 4bps YoY; 
    3. flat loan growth in constant currency terms; 
    4. broad-based migration of NPAs to worsening categories/more restructured loans (+32% QoQ); and 
    5. group NPLs rose to 1.2% (2Q:1.1%).
  • Accordingly, we cut FY16-17E net profit by ~3% mainly on slower topline growth and higher provisions. Our TP is slightly lowered to SGD7.40 based on ~0.8x FY17E P/BV. 
  • Maintain SELL.


Focus still on O&G sector, provisions adequacy 

  • Out of the SGD99m of specific provisions provided in 3Q16, 30% are related to the beleaguered O&G sector (i.e. SGD33m). 43% (i.e. SGD213m) of new NPA formation of SGD497m in 3Q16 are from the O&G sector. Management shared that 60% of O&G NPLs (i.e. SGD662m) are still performing in terms of principal and interest. 
  • While we applaud management’s more prudent approach to classify restructured loans as NPLs, we think OCBC is likely to face more headwinds in 4Q16 as more O&G corporates are now unable to pay bondholders and require debt restructuring.
  • In addition, NPAs with period overdue by > 90 days are now 68% of NPAs (2Q16: 53%). Cash flows in the corporate sector should stay tight without much revenue growth. 
  • Weaker domestic and regional economy amid the turning credit cycle is likely to result in more impairment. We raise provisions by 4-10% for FY16-18E and factor in higher credit costs at 35-39bps (from 32-38bps).


Maintain SELL 

  • We slightly lower our TP to SGD7.40 based on ~0.8x FY17E P/BV, close to 2SD below historical mean to reflect our forecast for ROE to remain below the 2008-2015 mean. 
  • Risks to our call include: 
    1. NIM improvement from higher interest rates; 
    2. higher non-interest income; and 
    3. lower provisions.


Swing Factors


Upside

  • Widening credit spreads from repricing of assets at higher interest rates.
  • Higher non-interest income from wealth management and higher contributions from GEH.
  • Sharp and sustained rebound in commodity prices.
  • Better-than-expected asset quality through proactive restructuring of loans, with no major credit slippages.
  • Better demand for Singapore mortgages from easing of property-cooling measures.

Downside

  • Oil prices stay low, sparking more NPLs in O&G support services.
  • Job losses in Singapore become pervasive, hurting its mortgage portfolio.
  • Sharp decline in value of trading securities and shocks in fixed-income portfolio.
  • Lack of liquidity of a funding currency.
  • Translation losses from MYR/IDR depreciation.
  • Emergence of dominant financial competitors in Singapore.
  • Capital-raising by peers may depress sentiment.




Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-28
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 7.40 Down 7.490



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