OCBC Bank - RHB Research 2015-10-15: Lower Non-II And Higher Credit Cost in 3Q15

SGinvestors.io

OCBC Bank OVERSEA-CHINESE BANKING CORP O39.SI 

OCBC: Lower Non-II And Higher Credit Cost in 3Q15 

• We expect OCBC’s 3Q15 net profit to decline 14% QoQ on sequentially lower non-interest income and higher impairment charges. 
• Maintain BUY while trimming FY15F-16F earnings by 3-3.5% with a revised TP of SGD10.90 (from SGD11.70, 18% upside). 
• NPLs would remain benign but credit cost would normalise from a low 18bps in 1H15. OCBC’s superior asset quality with better-than-expected fee income growth is a positive price catalyst. 

 Earnings to decline 14% QoQ in 3Q15. 

• Oversea-Chinese Banking Corporation (OCBC) is expected to release its 3Q15 results on the morning of 28 Oct. We expect the bank to post a net profit of approximately SGD900m, down 14% QoQ but up 7% YoY. 

 Lower investment income, higher provisions. 

• We believe the sequential decline in 3Q15 net profit would be caused by: 
  1. a 19% QoQ decline in non-interest income (non-II) following the strong growth in 2Q15 as the continued rise in bond yields since mid-May 2015 would dampen net trading and investment gains and, 
  2. a 31% QoQ increase in impairment charges as credit cost for the full year edges back to FY14’s 22 basis points (bps) from a low of 18bps in 1H15. 

 Earnings and TP lowered. 

• Forecast net profit is cut by 3.5% for FY15F and 3% for FY16F as we: i) trimmed loan growth assumptions to 3.5% (from 5%) for FY15F and 4.5% (from 5.5%) for FY16F and, ii) increase credit cost to 22bps (from 17bps) for both years. Our GGM-derived TP is revised to SGD10.90, implying a FY16F P/BV of 1.29x (historical mean: 1.35x) and P/E of 10.8x (historical mean: 11.8x). 

 Key risks to share price performance are: 

1. further delays in the US interest rate lift-off, 
2. potential hiccups in the integration of OCBC-WH, resulting in lower-than-expected contributions to group earnings and, 
3. sharper-than-expected deterioration in asset quality. 

 Maintain BUY. 

• Stock is currently trading at 1.05x FY16F P/BV, which is near -1SD historical mean. Key positive catalysts would be better-than-expected growth in fee income from the customer treasury flows and wealth management business. 
• OCBC has superior asset quality with GIL ratio of 0.7% (Jun 2015), the lowest among peers and with a loan loss coverage of 156%, the highest.

Singapore Research RHB Securities | http://www.rhbgroub.com/ 2015-10-15

RHB Securities SGX Stock Analyst Report BUY Maintain BUY 10.90 Down 11.70