Oversea-Chinese Banking Corp (OCBC SP) - 4Q16 The Long And Thorny Road To Recovery
- OCBC’s 4Q16 results were slightly below expectation due to higher-than-expected specific provisions for the O&G sector. While the pain from the O&G sector lingers on in 2017, we expect OCBC’s credit costs to taper off in 2018 and normalise in 2019.
- Share price has risen steeply and is understandably taking a well-deserved breather.
- Maintain BUY with a higher target price of S$10.75.
- Oversea-Chinese Banking Corp (OCBC) reported a net profit of S$789m for 4Q16 (- 17.8% yoy), slightly below our expectation of S$827m.
Return to positive loan growth.
- Loan growth rebounded 5.5% qoq in 4Q16 after suffering weak demand and a contraction in trade loans in 1H16.
- Organic loan growth was at 2% qoq in constant currency terms - excluding impact from the acquisition of Barclays’ wealth management business.
NIM edged up 1bp qoq to 1.63%.
- OCBC’s cost of deposits improved by 4bp qoq to 1.04% as CASA ratio improved to 51.1% (4Q15: 48.9%).
- Non-interest income was lacklustre.
- Fees grew 4% yoy to S$420m, driven by wealth management (+13% yoy) and fund management (+14% yoy). Contribution from life insurance declined 39% yoy due to higher expenses to support strong growth in sales, rise in medical claims and a high base effect (4Q15 boosted by mark-to-market gains).
- Net trading income declined 25% yoy to S$122m.
Distress in O&G space still ongoing.
- NPL ratio deteriorated slightly from 1.19% to 1.26%. NPLs increased S$306m or 12% qoq in 4Q16, coming mainly from large corporates within the Oil & Gas (O&G) sector.
- We estimated that NPLs for the O&G sector increased by S$237m or 21% qoq to S$1,343m. 52% of the O&G NPLs, some of which are restructured, are still being serviced (not overdue). The offshore support vessels (OSV) sub-sector accounted for 39% of its O&G portfolio, of which 22% are classified as NPLs.
- Total provisions were elevated at S$305m (57bp), an increase of 57% yoy. Specific provisions were hefty at S$235m due to exposure to the OSV sub-sector.
Disappointed but undaunted.
- The earnings miss for 4Q16 would affect OCBC’s share price negatively. However, we look forward to lower credit costs in the future. We expect credit costs to taper off starting 2018 and to normalise in 2019. In addition, firmer US interest rates would also be a positive catalyst for the banking sector.
- OCBC has declared a final dividend of 18 S cents/share, unchanged from 2015. Scrip dividend is not applicable for the final dividend.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
Turnaround in loan growth.
- Management guided for loan growth at a mid-single digit of 5% for 2017. Growth would come from Singapore companies investing overseas and expansion in Indonesia and Hong Kong.
- Going forward, there is no drag from contraction in US dollar-denominated trade loans that took advantage of interest rate differential between offshore and onshore renminbi.
Growth from wealth management.
- Bank of Singapore’s (BOS) AUM expanded by US$24b or 44% yoy to US$79b. The acquisition of Barclays’ wealth management business added AUM of US$13b and loans of S$2b-3b, and was completed in Nov 16.
- OCBC’s wealth management businesses, comprising insurance, asset management, stockbroking and private banking, including sale of unit trusts, bancassurance products, structured deposits and other treasury products, contributed 30% of group operating income in 4Q16 (2015: 27%).
- Expenses of S$34m were incurred to integrate Barclays’ wealth management business in Singapore and Hong Kong.
Distress in O&G space still ongoing.
- Management believes that oil prices have to stay at above US$60/bbl on a sustained basis before charterers would come back to sign medium to long-term contracts (currently, many vessels are tied up in short-term 1-year contracts).
- The bank reviews cash flows and value of collaterals (apply conservative haircut to valuations provided by professional valuers) and makes the necessary specific provisions every quarter. It also puts in additional general provisions to create a buffer.
Some delinquencies for housing loans.
- NPLs for housing loans increased by S$40m or 11% qoq to S$406m. Management disclosed that the bank repossessed nine properties. There were a few large ticket items at Sentosa Island.
- Management is also concerned about asset quality for retail, food & beverage and commodity processing sectors. These sectors accounted for 11-12% of total loans.
- We have trimmed our net profit forecast for 2017 by 2.8% to S$3,311m but our forecast for 2018 remains relatively unchanged.
- Maintain BUY.
- Our target price of S$10.75 is based on 1.19x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 9.0% (average of 2017F and 2018F), COE: 7.75% (Beta: 1.05x) and Growth: 1.0%).
- The stock provides an attractive dividend yield of 3.8%.
SHARE PRICE CATALYST
- Growth from regional markets in Indonesia, Hong Kong and China.
- Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.