CIMB Securities 2015-08-26: OCBC - Best ROEs in a downturn.


Best ROEs in a downturn 

  • As potential NPLs take centre stage in a market downturn, we believe OCBC’s share price could remain relatively sheltered as it stands on middle ground in exposure to the problem areas. 
  • OCBC’s credit quality was the most resilient during the GFC; we expect the same this round. We cut FY15-17 EPS by 6-14% to factor in recession assumptions. Even then, average FY15-17 ROE of 11.1% ROE is still comfortably above our cost of equity (9.5%), which implies a fair value of 1.22x P/BV. 
  • We maintain our Add call, but with a lower GGM-based target price of S$10.20. 

Wing Hang fees could buffer downside from insurance 

  • We cut non-NII growth in FY15-17 to account for lower capital markets related fees amidst a bear market. For OCBC, we see two opposing forces: 
    1. Great Eastern’s non-par fund has a relatively high weightage of bonds, which would take a hit in a rising rate environment and lead to lower insurance contributions to OCBC. 
    2. Fortunately, OCBC’s acquisition of Wing Hang Bank allows for cross-selling opportunities in wealth management to the latter’s SME client base, which provides downside protection as existing client activity fades. 
  • We cut our FY15/16/17 non-NII growth assumptions to -4.0%/-0.1%/ +2.8% (previously -2.1%/+5.8%/ +6.7%). Non-NII fell 19% yoy in 2008. 

Cut loan growth to 4% 

  • The banks have guided for mid-single digit loan growth in 2015, but we increasingly see the risk of loan growth coming in at the lower end of the range for several reasons: 
    1. Domestic loan demand remains weak amidst slow GDP growth. 
    2. Weaker ASEAN currencies (especially the ringgit and rupiah) will lead to lower translated loan balances in S$ terms and add to the slowdown in ASEAN. 
    3. OCBC is focusing on the regional flow business and targets Chinese corporates looking to expand in ASEAN but as infrastructure projects in Indonesia stall and growth in China slows, intra-regional flows may not be as robust. 
  • As such, we taper our loan growth assumption by 1% pt to 4%. 

Lowest credit costs 

  • Among the three banks, OCBC stands on middle ground in terms of exposure to the problem areas of oil & gas, ASEAN and Singapore property loans. Looking back to the GFC, OCBC had the lowest provisioning costs of 56bp (vs. average of 117bp for peers). NPL ratios also remained low at 1.6% (vs. 2.2% for peers). 
  • Wing Hang is not a concern – its NPL ratios were also low at c.1% during the GFC. We expect this cycle to be the same and pencil in 25bp/43bp/30bp provisions in FY15/16/17, lower than peers.


  • We maintain our Add call on OCBC, but with a lower target price of S$10.20 (based on GGM, 1.22x CY15 P/BV). After the steep market sell down, the stock trades at 1.06x CY16 P/BV and 8.9x CY16 P/E after we build in recession assumptions. Even after our EPS cuts to factor in slower loan growth, non-NII growth and higher provisions, OCBC impresses us with the highest FY16 ROE of 11%. 
  • Through the GFC when DBS and UOB saw NPL ratios rise to 2.3-2.9%, OCBC’s NPL ratio was the lowest at 1.7%. OCBC’s provisioning cost was also the lowest at 53bp when DBS’s was 120bp and UOB’s was 113bp. We believe the current credit cycle will likely see similar trends. 
  • In addition, we believe OCBC has the added engine of growth from cross-selling opportunities in wealth management and insurance to Wing Hang Bank’s SME customer base, which could partially offset the fall in capital markets-related fees across the board.

Kenneth NG CFA | Jessalynn CHEN | http://research.itradecimb.com/ CIMB Securities 2015-08-26
ADD Maintain ADD 10.20 Down 11.65