OCBC - Maybank Kim Eng 2016-02-18: Tour de France

OCBC - Maybank Kim Eng Analyst Report 2016-02-18: Tour de France OCBC Bank OVERSEA-CHINESE BANKING CORP O39.SI 

OCBC Bank (OCBC SP) - Tour de France 

Test of Management 

  • Mettle FY15 beat expectations but the results and management’s subsequent briefing only served to affirm that the landscape will likely get more dire from here. 
  • Core PATMI of SGD3,903m (+2% YoY) beat on better noninterest income, which looks unsustainable. 
  • NIM improved by 7bps YoY to 1.74% from higher loan yields, but management does not foresee the same magnitude of increase for 2016 and expects NIM to be slightly better than 1.67%. 
  • We think earnings visibility remains weak and asset quality will deteriorate further. 
  • We believe how management weathers its first crisis after taking over the helm will determine the bank’s market position in the coming years. (The same applies for the other banks). 
  • Maintain SELL with a lower SGD7.20 TP, after rolling forward to 0.84x FY16 P/BV (from 1.1x), close to 2SD below its historical mean. 

Asset Quality Deterioration Far from Over 

  • Although group NPLs remained stable at 0.9% (+30bps YoY, 4Q14: 0.6%), we expect more deterioration, especially in the transport sector (+50bps QoQ) and Indonesia (+40bps QoQ). 
  • Management believes that provisions are adequate for now and has been as proactive as possible. But low oil prices are likely to add more stress to the O&G support services segment, which is likely to be classified under the transport sector. 
  • OCBC’s NPL level in critical offshore and Indonesia is less than half that of UOB’s. 

CET1 Slightly Above Comfort Level 

  • Fully loaded CET1 improved to 11.8% (3Q15: 11.4%, 4Q14: 10.6%), including the recognition of the revised definition of RWA to include loan commitments. RWAs increased by SGD2b as a result. Management is comfortable with anything above 11.4%. 
  • With current levels not too far off and SGD1,470m to be paid out as dividends, we think OCBC (and the other banks as well) will have to be careful with its lending. 
  • Trough Valuations OCBC is now trading close to its GFC trough valuations of 0.7x forward P/BV. 
  • Our TP falls to SGD7.20 after rolling forward to 0.84x FY16 P/BV (from 1.1x), close to 2SD below its historical mean.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-18
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 7.20 Down 8.65