OCBC Bank - Maybank Kim Eng 2016-05-03: Weaker growth

OCBC Bank - Maybank Kim Eng 2016-05-03: Weaker growth OCBC Bank OVERSEA-CHINESE BANKING CORP O39.SI 

OCBC Bank (OCBC SP) - Tougher Landscape 


Weaker growth 

  • 1Q16 results accentuated our concerns about revenue prospects and capital constraints. 
  • Asset quality looks likely to get worse. 
  • Core PATMI of SGD856m (-11% QoQ, -14% YoY) flagged vulnerabilities in: 
    1. Greater China where loans fell (-8% QoQ, -9% YoY) arising from weak RMB & HKD and Chinese companies borrowing onshore, 
    2. Non-interest income due to lower fees and insurance contribution (-22% QoQ, -13% YoY), 
    3. New NPLs as older ones migrate to worse category. 
  • Management guided low single digit loan growth and stable NIM. 
  • We trimmed FY16-18E net profit estimates by 1-2%, adjusting for lower non-interest income and higher provisions. 
  • Maintain SELL at SGD7.20 TP, on 0.8x FY16E P/BV, close to 2SD below its historical mean, to reflect forward ROE that would be below 2008-2015 mean. 

Capital management is key 

  • Fully loaded CET1 rose 60bps QoQ to 12.4% (4Q15: 11.8%), mainly on lower RWAs (-1.6% QoQ, -3.4% YoY) as lending slows. 
  • Stricter regulatory environment/Basel rules signal higher risk weights and therefore capital intensity. 
  • RWA optimisation assumes greater importance. Management shared that standardised treatment of credit portfolio will impact them. 
  • Movement towards standardisation will have a significant impact on capital for banks, with a potential impact of ~100bps. 

More migration of NPLs 

  • Group NPL rose to 1% largely due to O&G support services segment. 1Q saw more NPAs across the board in substandard (+4% QoQ), doubtful (+33% QoQ) and loss (+8% QoQ) categories. 
  • NPAs in “Over 180 days” category rose to 37% of total NPLs (4Q15: 29%). 
  • Given the overcapacity in O&G and that supporting industries face immense pricing pressures and utilisation, recent uptick in oil price is a reprieve but not the bottom. 

Maintain SELL 

  • Stock has rebounded and is now trading at ~1x P/BV, close to 1SD below 10-year mean. 
  • Catalysts include 
    1. stable market environment, 
    2. ability to reprice from higher risk premiums, and 
    3. RWA optimisation. 

Swing Factors 


Upside 

  • Widening credit spreads from repricing of assets at higher interest rates. 
  • Higher non-interest income from wealth management and higher contributions from GEH. 
  • Sharp and sustained rebound in commodity prices. 
  • Better-than-expected asset quality through proactive restructuring of loans, with no major credit slippages. 
  • Better demand for Singapore mortgages from easing of property-cooling measures. 

Downside 

  • Oil prices stay low, sparking more NPLs in O&G support services. 
  • Job losses in Singapore become pervasive, hurting its mortgage portfolio. 
  • Sharp decline in value of trading securities and shocks in fixed-income portfolio. 
  • Lack of liquidity of a funding currency. 
  • Translation losses from MYR/IDR depreciation. 
  • Emergence of dominant financial competitors in Singapore. 
  • Capital-raising by peers may depress sentiment. 




Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-03
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 7.20 Same 7.20


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