OCBC
OVERSEA-CHINESE BANKING CORP
O39.SI
OCBC - Insurance-led beat mostly accounting driven
- 4Q headline net profit of S$960m was ahead of mainly due to an insurance beat.
- GEH 4Q earnings did well on tax write-backs, a release of reserves (improved claims experience) and a narrowing of credit spreads, i.e. accounting-driven
- Ex-GEH, core bank earnings were in line. Loans was -1% qoq but NIMs jumped 8bp to compensate. Fees and trading in line. Costs and provisions higher than expected.
- Maintain Add. TP cut to S$10.01 (CY16F P/BV of 1.16x, GGM) as we cut forward EPS by 3-4% on lowered margins and fees. We have not raised provisions further.
■ Slower NII growth, pulling in loans, charging higher lending yields
- 4Q NII was +1.8% qoq. Loans contracted 1% qoq but NII growth was saved by a big 8bp margin expansion.
- OCBC explained that wider NIMs (1.74%) was due to better loan yields but quarter-to-quarter NIMs could be affected by timing of interest recoveries. The guidance is that 2016 NIMs would be slightly better than 2015 (1.67%), suggesting that NIMs could be flat or narrow slightly from 4Q.
- Ahead, the demand for loans is expected to be tepid.
■ Fee and trading income was in line, insurance had a spike in 4Q
- Fee income was flat, trading was +8% qoq, a decent performance in a seasonally weak quarter.
- Overall 4Q non-interest income (+24% qoq) was up on very strong insurance contributions, due to:
- an unwind of prior years’ tax provisions,
- a release of reserves on low claims experience in Singapore non-par fund; and
- a narrowing of the credit spread helping the investment portfolio.
- We view the quality of the beat as not great.
■ Costs were higher than expected
- Overheads turned up much higher than expected (+8% qoq), but due to the heightened insurance contributions, Group cost ratio was lower (42%, vs 3Q: 43%).
- For the full year, costs were up 12% yoy on the Wing Hang consolidation.
- Ex-WHB, FY15 overhead costs were only +5% yoy. The higher 4Q overhead costs would have brought PPOP below expectations, if we backed out the insurance blip.
■ NPLs: oil & gas still stressed, but new NPL formation less than 3Q
- Focus was obviously on asset quality.
- Though the 4Q NPL ratio (0.9%) stayed flat, total loan allowances rose to 28bp, as the bank padded GP in anticipation of more woes in the oil and gas sector, the sector most under duress.
- OCBC disclosed that of its increase in NPL ratio from 0.6% (2014) to 0.9% (2015), oil and gas contributed to an NPL ratio of 0.39% currently, from almost nothing a year ago.
- We provide more details inside this note.
■ Maintain Add; looking good on all metrics
- We are positive on OCBC on a few factors:
- the lowest NPL ratio among peers despite what we sense as more conservative policies, having started to term out payment schedules of its oil and gas clients in 3Q;
- the highest cumulative provisions coverage to unsecured NPLs;
- a fully loaded CET1 ratio that has now closed the gap to peers;
- less oil and gas exposure than DBS; and
- comparable valuations to DBS i.e. joint cheapest of Singapore banks.
- We maintain our Add rating.
Kenneth NG CFA
CIMB Securities
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Jessalynn CHEN
CIMB Securities
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http://research.itradecimb.com/
2016-02-18
CIMB Securities
SGX Stock
Analyst Report
10.01
Down
10.88