Oversea-Chinese Banking Corp (OCBC SP) - UOB Kay Hian 2017-05-11: 1Q17 Broad-based Growth In Non-interest Income

OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corp (OCBC SP) - 1Q17 Broad-based Growth In Non-interest Income

OCBC’s solid 1Q17 results were characterised by strong growth in fee income, increased contribution from the insurance segment and lower credit costs.
Fees from wealth management grew 70% yoy and 37% qoq. Asset quality has stabilised and specific provisions have moderated significantly.
Pre-provision operating profit grew 12.6% yoy.
Maintain BUY with higher target price at S$11.70.

Oversea-Chinese Banking Corp (OCBC) reported a net profit of S$973m (+14% yoy), above our expectation of S$805m and consensus estimate of S$818m.
Steady expansion in loans. Loans expanded 8% yoy and 2.1% qoq while NIM receded marginally by 1bp qoq to 1.62%. Sequential expansion in loans was mainly driven by Singapore (+2.3% qoq) and Indonesia (+3.6% qoq) operations.

Fees expanded 29% yoy, supported by a strong fee income rebound of 70% yoy and 37% qoq from wealth management.
Earnings contributions from life insurance doubled on a yoy basis to S$176m with markto-market gains from narrowing credit spreads and a rally in the equity market.
Net trading income was at S$158m, up 29.5% yoy. Gains from investment securities increased 10% yoy to S$65m.

Operating expenses increased 5.2% yoy. Excluding the impact from the acquisition of Barclays’s wealth management business, operating expenses would have increased by a smaller 2.8% yoy.
Asset quality has stabilised. NPL ratio was stable at 1.3%. NPL formation has moderated significantly to S$391m (4Q16: S$510m). Provisions moderated from S$305m in 4Q16 to S$168m in 1Q17, representing a drop of 45% qoq.

OCBC achieved broad-based growth in non-interest income of 30% yoy. The results gave further confirmation that the worst in terms of NPL formation from the oil & gas sector is over.

Management explained that NIM compression of 1bp qoq was due to one-off factors:
1. Larger amount of interest income from NPLs not being recognised. Excluding this factor, NIM would have expanded 2bp qoq.
2. NIM at OCBC Wing Hang compressed 7bp qoq. Loans were pegged to 1-month HIBOR but fixed deposits were set based on 3-month HIBOR. Gapping positions were not put in place in 1Q17, thus resulting in temporary NIM compression.
NIM is expected to improve in subsequent quarters as loan growth gathers momentum.
Management guided for a NIM of 1.66-1.67% for the full year of 2017.

Wealth management income, encompassing insurance, asset management, stockbroking, private banking and sales of unit trusts, bancassurance products and structured deposits, accounted for 32% of group total income. AUM expanded by 7.6% qoq to US$85b due to organic growth.
The acquisition of Barclays’ wealth management business in Singapore and Hong Kong was completed in Nov 16 and added AUM of about US$13b in 4Q16.

Management does not expect any further negative impact from lumpy NPLs. However, management felt that it is too early to conclude that the oil & gas sector is recovering. Management is concerned that a prolonged trough could put further downward pressure on valuation of collaterals.
22% of loans extended to offshore support vessels (OSV) are already recognised as NPLs (include conglomerate and Chinese SOEs). Specific provisions for the portfolio are at about 20% of gross loans.

We raise our net profit forecast for 2017 by 13% and by 8.2% for 2018 due to a decrease in specific provisions.

Maintain BUY.
Our target price of S$11.70 is based on 1.30x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 9.8%, COE: 7.75% (Beta: 1.05x) and Growth: 1.0%).
The stock provides a decent dividend yield of 3.4%.

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.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-11

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.70 Up 10.750