OCBC - CIMB Research 2016-02-18: Insurance-led beat mostly accounting driven

OCBC - CIMB Research 2016-02-18: Insurance-led beat mostly accounting driven 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: 
    1. an unwind of prior years’ tax provisions, 
    2. a release of reserves on low claims experience in Singapore non-par fund; and 
    3. 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: 
    1. 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; 
    2. the highest cumulative provisions coverage to unsecured NPLs; 
    3. a fully loaded CET1 ratio that has now closed the gap to peers; 
    4. less oil and gas exposure than DBS; and 
    5. comparable valuations to DBS i.e. joint cheapest of Singapore banks. 
  • We maintain our Add rating.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-02-18
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 10.01 Down 10.88