Oversea-Chinese Banking Corp - Oil & Gas Provisioning Remains Challenging
- We expect 2017 provisions to rise 41% from 2016’s level, as collateral values for oil & gas loans stay soft, and asset quality deterioration continues. However, we forecast 2017 NIM of 1.69% (wider than 4Q16’s 1.63%), on the back of a firmer SIBOR.
- With 4Q16 net profit below market expectations (though in line with ours), and a weak earnings outlook, we believe investors may stay away from OCBC pending more news flow.
- We therefore maintain our NEUTRAL call, tweaking our TP marginally to SGD8.90 (9% downside), from SGD8.81.
NIM to expand marginally in 2017.
- Management expects 2017 NIM to be wider than 4Q16’s 1.63%. The expected Fed Fund rate hikes should lead to a firmer Singapore Interbank Offered Rate (SIBOR) and help widen NIM.
- Further contributing to net interest income growth would be OCBC’s expectation of mid single-digit loan growth for 2017.
Expect provisions to remain high in future quarters.
- 4Q16 specific credit cost of 44bps was up from 3Q16’s 19bps. NPL ratio rose marginally to 1.3% (3Q16: 1.2%).
- Management remains concerned about the provisioning for its oil & gas loan portfolio.
- We believe further deterioration in oil & gas collateral values could contribute to total provisions rising by 41% in 2017 – with specific credit cost of 39bps. We forecast an end-2017 NPL ratio of 1.6%.
OCBC’s high provisioning for oil & gas suggests its peers (which have yet to release results) may do likewise.
- Our view remains that United Overseas Bank’s (UOB) (UOB SP, BUY, TP: SGD22.90) stronger balance sheet strength (higher GP/loan ratio) provides UOB with a cushion in such times. UOB’s share price has tracked the SG banking sector’s performance since late Jan 2017, and looking ahead, we expect it to outperform.
- After fine-tuning our assumptions, we tweak our GGM-derived TP to SGD8.90 – factoring in 9.8% CoE and 9.5% ROE (2016 ROE was 10%) – implying 1x 2017F P/BV.
- The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represents the upside risks.