OCBC - DBS Research 2016-05-03: On its toes

OVERSEA-CHINESE BANKING CORP OCBC O39.SI

OCBC - On its toes

1Q16 earnings were broadly in-line; results would have been better if not for a significant decline in its insurance contribution and higher provisions
Total oil & gas exposure at 6% of total loans; bulk of new NPL formation was from this sector
NIM to stay flattish while loan growth is likely at low single digits for 2016

Limited upside and cloudy outlook for Singapore banks have prompted us to downgrade the stock to HOLD; S$9.40 TP unchanged.

The focus in 2016 would likely be on managing expenses and containing asset quality.
Loan growth is expected to be at low single digits while NIM would likely stay flat.
Higher credit costs are imputed given the vulnerability of its oil & gas exposure which currently stands at 6% of total loans.
Its share price has rallied since early this year. Given the limited share price upside and cloudy outlook for the Singapore banks, we downgrade OCBC to HOLD.

Two parts of 1Q16 earnings which would otherwise made this a much stronger quarter were:
1. OCBC’s insurance contribution from Great Eastern plunged due to unrealised mark-to-market losses of S$108m as a result of widening credit spreads and decline in equity markets; and
2. OCBC also made higher provisions of S$103m due to the continued challenging outlook for the oil & gas segment.
Of its oil & gas exposure of S$12.4bn (6% of total loans), 61% is still performing but where accounts have been restructured, they would be classified as NPL. This brought NPL ratio up to 1.0% from 0.9% in the previous quarter. Elsewhere, NIM was flattish (+1bps q-o-q), while loans and deposits both contracted.

Wealth management income may stay muted due to the uncertain market environment but the long-term prospects of this business remain attractive.
Insurance contribution could be volatile due to accounting treatments but the underlying growth in new business embedded value and total weighted sales should be the focus parameters for insurance, and these have been robust.

While there are near-term uncertainties on Greater China growth prospects, we believe the market may be under appreciating the OCBC-WHB’s franchise over the longer term.
With its enlarged Greater China presence, OCBC’s growth prospects in wealth management, retail & commercial banking and insurance are further enhanced.
Active cross-selling for OCBC’s private banking and insurance businesses are key wins.

Our S$9.40 TP that implies 1.0x FY16F BV is derived from the Gordon Growth Model.
The potential reach of its differentiated non-interest income franchise should support valuations.

A significant upset in asset quality. While we have assumed higher credit cost and NPL ratio in FY16F but a more severe-than-expected deterioration in asset quality related to the oil & gas and commodities segments could pose downside risk.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-05-03

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