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

OCBC Bank OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - Tougher Landscape

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.

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.

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.

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.

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.

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