OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-05-11: More Opportunities, U/G to HOLD

OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-05-11: More Opportunities; U/G to HOLD OVERSEA-CHINESE BANKING CORP O39.SI

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: 
    1. higher loan growth assumption of c.6% (from 2-3%); 
    2. higher non-interest income (non-II) by 7-10% mainly from higher wealth management (WM) fees and Great Eastern (GE) contributions; and 
    3. 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: 
    1. NIM improvement from higher rates; 
    2. higher non-interest income; and 
    3. benign credit cost.






Swing Factors


Upside

  • 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.

Downside

  • 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.



Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-05-11
Maybank Kim Eng SGX Stock Analyst Report HOLD Upgrade SELL 9.85 Up 8.050



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