UOB Kay Hian 2015-08-03: OCBC - 2Q15 Results. Fast Catching Up In Capital Adequacy. Maintain BUY.

Fast Catching Up In Capital Adequacy 


  • OCBC’s 2Q15 results were above expectations due to strong growth in fee income, gains from investment securities, increase in credit costs and higher contribution from associate Bank of Ningbo. 
  • We are gratified that CET-1 CAR has improved 0.5ppt qoq to 11.2% as a result of retained earnings, its scrip dividend scheme, reduction in risk-weighted assets and divestment of an 8.2% stake in New China Life. 
  • Maintain BUY. Target price: S$13.02. 





RESULTS 


  • Oversea-Chinese Banking Corporation (OCBC) reported net profit of S$1,048m for 2Q15, which is above our expectation of S$948m and consensus estimate of S$986m. 
  • Loans expanded 18.4% yoy but were flat qoq. Loans would have grown 2% qoq in constant currency terms. Excluding OCBC Wing Hang, loan growth was 3% yoy. Net interest margin (NIM) expanded 5bp qoq to 1.67% due to re-pricing of corporate and housing loans in Singapore. 
  • Fees increased 24% yoy to S$438m, driven by broad-based growth across the brokerage, wealth management, credit cards and loan processing segments. 
  • Net trading income was softer at S$70m. Contributions from associates expanded by five-fold yoy to S$102m due to growth from Bank of Ningbo. 
  • Absolute NPLs increased 8.5% qoq due to Malaysia and Indonesia (one oil & gas account). NPL ratio remained low at 0.7%. Specific provisions were S$47m, or only 9bp. 
  • The results included gains of S$136m from the divestment of an 8.2% stake in New China Life by Great Eastern, of which OCBC's share was S$105m. 
  • Common equity tier-1 CAR improved 0.5ppt qoq to 11.2% due to retained earnings, its scrip dividend scheme, reduction in risk-weighted assets and divestment of an 8.2% stake in New China Life. OCBC has closed the gap in capital adequacy with peers DBS and UOB. 
  • OCBC declared interim dividend of 18 S cents per share for 1H15, unchanged compared with last year. The scrip dividend scheme applies and issue price of new shares is set at a 10% discount. 



STOCK IMPACT 


  • Management maintained guidance of mid-single digit loan growth for 2015. Current NIM of 1.67% is expected to be sustainable in 2H15. 
  • Uncertainties in Malaysia. Management sees weakening asset quality for Malaysia. It expects decent loan growth from housing and from companies expanding overseas. Management has already tightened on lending a few months ago. Fortunately, competition for deposits has stabilised. 
  • Fast catching up in capital adequacy. OCBC has completed credit risk modelling for Internal Ratings-Based (IRB) Approach for subsidiary Bank of Singapore (BOS), which is currently being validated by MAS. Management expects IRB Approach for BOS to be implemented in 2016. IRB Approach for OCBC Wing Hang is to be implemented in 2017. It will work on IRB for OCBC NISP further down the road. 
  • We estimated OCBC could boost CET-1 CAR by 0.6% per year through its scrip dividend scheme. It could be able to catch up and raise fully loaded CET-1 CAR to above 12% over the next 12 months. 



EARNINGS REVISION/RISK 


  • We increase our net profit forecasts by 5% for 2015 and by 6% for 2016 due to good 1Q15 results, stronger growth in fee income and increasing contribution from Bank of Ningbo. 



VALUATION/RECOMMENDATION 


  • Maintain BUY. Our target price of S$13.02 is based on P/B of 1.59x, derived from Gordon Growth Model (ROE: 11.5%, COE: 7.8% and Growth: 1.5%). 



SHARE PRICE CATALYST 


  • Growth from regional markets in Malaysia, Indonesia and China.  Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.



Analyst: Jonathan Koh, CFA

Source: http://research.uobkayhian.com/


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