RHB Securities 2015-08-03: OCBC - Good Improvement In 2Q15. Maintain BUY.

Good Improvement In 2Q15

  • OCBC’s 2Q15 net profit grew a healthy 5% QoQ, beating market expectations. 
  • Maintain BUY with an unchanged SGD11.70 TP (14% upside), as margin improvement flowed through as guided, fee income growth momentum was strong while CET-1 improved. 
  • Our TP implies P/BV of 1.5x FY15F, compared with the current valuation of 1.25x and historical mean of 1.4x. 

 2Q15 earnings beat expectations. 

  • 2Q15 net profit of SGD1,048m (+14% YoY, +5% QoQ) was 6% higher than consensus estimates while 1H15 earnings of SGD2,041m were 51%/53% of our/street FY15 forecasts. 
  • The sequential earnings improvement came mainly from healthy income growth (+5% QoQ) and higher contributions from associates (+14%). 
  • OCBC Wing Hang’s (OCBC WH) earnings grew 10% QoQ to HKD540m and accounted for 8% of 2Q15 group pretax profit. 
  • Key positives for 2Q15 were: 
    1. net interest margin (NIM) expanded 5bps QoQ on better asset yields with a rise in Singapore short-term interest rates and reduced excess liquidity (loan-to-deposit ratio (LDR) edged up to 84.3% vs 83% in 1Q15), 
    2. strong 11% QoQ growth in fee income (brokerage +44%, investment banking +66% and loan-related +11%), 
    3. profits from associates (largely from 20%-owned Bank of Ningbo) rose 15% QoQ to SGD102m, and 
    4. fully-loaded common equity tier-1 (CET-1) ratio strengthened to 11.2% (Dec 2014: 10.6%). 
  • The negatives were: 
    1. an 8% QoQ rise in gross impaired loans (GILs) that led to higher credit cost of 20bps (1Q15: 17bps) and lower loan loss reserves of 156.4% (Mar 2015: 169.8%), and 
    2. still soft loan demand. Gross loans were flat QoQ but up 2% QoQ on constant currency terms. 

 Challenging outlook for ASEAN. 

  • Management is cautious on the outlook for Indonesia and Malaysia as the challenging economic environment has caused: 
    1. asset quality to weaken with GIL expected to trend higher in the near term, and 
    2. loan demand to be depressed. 
  • Overall, management expects mid-single digit loan growth for 2015 and stable NIM in 2H15. 

 Maintain BUY with GGM-based TP of SGD11.70 (1.5x FY15F P/BV). 

  • OCBC delivered a good set of results for 2Q15. 
  • For the quarter, NIM improvement flowed through, fee income growth momentum was robust while CET-1 improved. 
  • Impaired loans ticked up but OCBC’s GIL ratio of 0.7% is the lowest among its peers while its loan loss reserves ratio of 156% is the highest.

Analyst: Singapore Research

Source: http://www.rhbgroub.com/