Oversea-Chinese Banking Corporation (OCBC SP) - 1Q17 Results Preview: Growth In Fees And Contribution From Great Eastern
- We expect Oversea-Chinese Banking Corporation (OCBC) to achieve a respectable net profit of S$805m for 1Q17, down 6% yoy but up 2% qoq.
- We see growth from fee income, driven by wealth management, and higher but normalised contribution from Great Eastern.
- Unfortunately, asset quality for the oil & gas sector remains stressed and we expect credit costs to stay elevated at 42p.
- Maintain BUY as NIM should gradually recover on higher interest rates while credit costs are expected to taper off in 2018.
- Target price: S$10.75.
1Q17 results preview.
- We expect Oversea-Chinese Banking Corporation (OCBC) to achieve healthy loan growth of 6.6% yoy and 0.8% qoq in 1Q17. Loan demand would likely have come from the building & construction segment and housing loans in Singapore, as well as from local conglomerates expanding into overseas markets. NIM is expected to have been relatively flat qoq.
- We expect fees & commissions to have expanded 16.2% yoy to S$434m, driven by wealth management. OCBC completed the acquisition of Barclays’ wealth management business in Nov 16 and benefitted from growth in bancassurance. We also expect healthy contributions from loan-related fees. We expect net trading income of S$120m.
- Bond yields have receded slightly in Singapore and moved mostly sideways in Malaysia during 1Q17. As such, we expect contributions from Great Eastern to be normalised at about S$170m vs just S$83m in 1Q16, affected by higher claims in its non-participating funds, widening of credit spreads and correction in the equity market.
Oil & gas sector remains under pressure.
- Management was conservative by recognising vulnerable accounts as NPLs early and was proactive in rescheduling and restructuring affected accounts.
- We expect provisions to remain elevated at S$231m, equivalent to 42bp (1Q16: 32bp, 4Q16: 57bp), due to lower valuations of collaterals.
Respectable results despite tough environment.
- We expect OCBC to achieve net profit of S$805m in 1Q17, down 6% yoy but up 2% qoq.
From dovish to neutral.
- Fed chair Janet Yellen said that the era of ultra-simulative monetary policy is coming to an end. The Fed has switched from its previous focus of reviving a recession-scarred economy to maintaining growth momentum achieved over the past few years. She also said gradual hikes in interest rates were appropriate.
- President of New York Fed William Dudley even suggested starting reducing the size of the Fed’s balance sheet later this year although this is not expected to be disruptive.
Gradual recovery in NIM.
- Management expects NIM to stay flat at 1.67% in 2017. NIM was 1.63% in 4Q16 and is expected to gradually recover on a sequential basis in the subsequent quarters. However, NIM upside is capped by competition in servicing highgrade corporates.
Indonesia was star performer.
- Contribution from OCBC NISP increased 18% to S$152m in 2016. Loan growth was moderate at 8% but NIM improved 55bp to 4.62%.
- Increase in operating expense was controlled at 12% and cost-to-income ratio improved 7.1ppt to 46.3%. CET-1 CAR was robust at 17.2%.
Management expects loan growth of 10-12% for Indonesia in 2017.
- The bank has traditionally focused on SMEs, especially local Chinese business community, but has expanded to servicing large corporates in recent years. Management sees wealth management and insurance as under-penetrated segments and expects growth in these two areas in coming years.
- We maintain our earnings forecasts.
- Maintain BUY. Our target price of S$10.75 is based on 1.19x 2017F P/B, derived from the Gordon Growth Model (ROE: 9.0%, COE: 7.75% (beta: 1.05x), growth: 1.0%).
- The stock provides an attractive dividend yield of 3.8%.
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- Growth from commercial banking businesses in regional markets, such as Malaysia, Indonesia and Greater China.
- Non-interest income from wealth management and life insurance will expand in tandem with growing affluence in Asia.