OCBC Bank - Maybank Kim Eng 2015-10-14: Lacks power


OCBC Bank - Lacks power 

  • Unlike the other two banks, our quantitative models suggest that OCBC’s NIMs benefits more convincingly from pass through in credit risks than from repricing intervals. 
  • We think OCBC’s hazy competitive positioning shows up in our study. The weaker deposit franchise attenuates benefits from rate repricing in assets/liabilities. And despite the ability to pass through higher credit risks in a difficult landscape, that pricing power seems to vapourise in a normalised environment. 
  • We expect the lending environment to become less supportive hereon. Cash flow crunch in selected sectors may warrant added provisions. We are downgrading our view on the sector and downgrading OCBC to SELL at TP SGD8.50

Not a key beneficiary of higher rates 

  • OCBC’s competitive positioning is less apparent against UOB’s strong SME franchise and DBS’s huge and cheap deposit base. In our sector report, we highlight OCBC’s ability to pass through higher risk premium during an uncertain lending environment but that pricing power dissipate in a normalised credit environment. We speculate the weaker deposit franchise may curtail benefits from repricing intervals during a rate hike. 
  • From our quantitative study, Group NIM will increase by 9-13bps in our scenario analysis for every 50 bps increase in SIBOR, credit spread and interest differential. 
  • Among Singapore banks, OCBC has the largest non-SGD exposure (DBS: 60.2%, OCBC: 63.7%, UOB: 46.8%). As higher rates, stronger USD and weaker economic outlook will impair customers’ ability to repay loans, we increase estimates for OCBC provisions by 20-25% for FY16-17E. 

Lacks catalysts; D/G to SELL 

  • As there are no immediate positive catalysts, we downgrade to SELL with SGD 8.50 TP, at 1.1x FY15 P/BV, close to 1SD below its mean since 2005.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-14
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