OCBC - DBS Research 2016-10-27: Asset quality remains an issue

OCBC - DBS Vickers 2016-10-27: Asset quality remains an issue OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - Asset quality remains an issue

  • 3Q16 earnings were lifted by better insurance and wealth management income; provisions were higher; NPL ratio rose to 1.2%.
  • NPL issues have yet to peak; new NPL formation remains prevalent largely from the oil & gas segment; staying watchful on SME loans.
  • Slight pick up in loan growth expected in 4Q16 and going into 2017.
  • Maintain HOLD, TP raised to S$8.60 as we roll forward valuation base to 2017.


Uninspiring outlook; HOLD. 

  • The focus in 2016 would likely be on managing expenses and containing asset quality. 
  • Loan growth is expected to be at low single digits while NIM would likely stay flat at current levels. 
  • Higher credit costs are imputed given the vulnerability of its oil & gas exposure which currently stands at 6% of total loans. 
  • The underlying business of its insurance segment measured by total weighted new sales and new business embedded value remains robust. 
  • Outlook is uninspiring but dividend yields could support valuations.


3Q16 earnings above consensus expectations; in line with ours.

  • 3Q16 earnings were lifted by better insurance and wealth management income. NIM slipped by 2bps while loans grew 2% q-o-q (-2% y-o-y). Expenses remained well controlled.
  • Provisions (both general and specific provisions) were higher. One-third of specific provisions were related to the oil & gas sector. 
  • New NPL formation eased to S$497m (2Q16: S$924m), 43% of these were from the oil & gas sector. 60% of its oil & gas NPLs are still performing, currently servicing either interest or principal or both. NPL ratio rose to 1.2%. Excluding the oil & gas sector, NPL ratio was largely stable at 0.7%. Separately, capital ratios remained strong.


Asset quality still an issue. 

  • Although the new NPL formation has reduced during the quarter, the peak is far from near. More negotiations are expected to emerge from the oil & gas sector, hence new NPL formation would still be prevalent. 
  • Management hinted that NPL ratio would unlikely hit the high of 2.1% that it recorded at the peak of the Global Financial Crisis (GFC). 
  • The SME portfolio will be closely monitored as this segment tends to be vulnerable in a prolonged soft economic environment.

Valuation

  • Our TP is raised to S$8.60 after rolling forward the valuation base to 2017. This implies 0.9x FY17F BV and is derived from the Gordon Growth Model (11% ROE, 3% growth, 12% cost of equity). Valuations could be held up by dividend yield of 4%.
  • We believe the stock will likely trade range-bound until a new catalyst emerges for the Singapore banks.

Key Risks to Our View

  • Further upset in asset quality. We have assumed higher credit cost and NPL ratio in FY16F, but a more severe-than- expected deterioration in asset quality related to the oil & gas and commodity segments could pose downside risk.




LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-10-27
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 8.60 Up 8.400



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