OCBC Bank (OCBC SP) - More Opportunities; U/G to HOLD
1Q17 beat expectations; Raised EPS and TP
- 1Q17 core PATMI of SGD973m (+23% QoQ, +14% YoY) beat our expectations, meeting 27% of our previous FY17 forecast.
- Similar to DBS and UOB, 1Q17 results reflected positive signs as we see potential upside to earnings and growth prospects ahead.
- We raise FY17-19E core net profit by 7-16% mainly on:
- higher loan growth assumption of c.6% (from 2-3%);
- higher non-interest income (non-II) by 7-10% mainly from higher wealth management (WM) fees and Great Eastern (GE) contributions; and
- lower provisions by 4-5%. Our FY17-19E credit costs are now 28–36bps (from 32- 38bps).
- With the change in EPS forecasts, our assumed sustainable ROE is now 11.1% (9.8% previously), COE of 10.5% and growth rate of 3.5%. With that, our TP is raised 22% to SGD9.85, based on ~1.1x FY17E P/BV (from ~0.9x previously). U/G to HOLD.
Earnings driven by non-II
- FI lending and lending to “Rest of the World” rose 9%/8.5% QoQ respectively, mainly from corporates looking to invest in the UK, Australia etc.
- We raise loan growth estimates to 6% as we think more lending opportunities could arise for further growth. However, 1Q17 NIM fell 1bp QoQ to 1.62% due to 2bps adjustment on higher non-recognition of interest income on NPLs. Excluding this, NIM would improve by 1bp QoQ, but still lower than peers’ +3-4bps.
- We think margin compression will likely continue as the bank faces competitive pressures and chases after high quality credit. We expect FY17 NIM to expand slightly to 1.68% on the back of higher rates.
- We think further catalysts could come from higher WM fees. Bank of Singapore’s (OCBC’s private banking arm) AUM rose decently by USD6b QoQ to USD85b. While WM fees rose 37% QoQ partly due to positive market sentiment, we think organic growth from its BOS franchise and tie-ups of product launches with its other subsidiaries, such as Lion Global Investors, makes it well-positioned in the space.
- WM revenue is now increasingly important for Singapore banks to bolster earnings as they play catch-up and gain market shares from the smaller players.
U/G to HOLD
- We upgrade OCBC to HOLD.
- Risks to our call include:
- NIM improvement from higher rates;
- higher non-interest income; and
- benign credit cost.
- Widening credit spreads from repricing of assets at higher interest rates.
- Higher non-interest income from wealth management and higher contributions from Great Eastern.
- 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.
- 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.