OVERSEA-CHINESE BANKING CORP
OCBC
O39.SI
Oversea-Chinese Banking Corp - Prudent management amidst persistent headwinds
- NPAT declined 15% yoy in 2Q16 to S$885mn, driven by 16% yoy lower non-interest income. Excluding a one-off realised gain in 2Q15, NPAT and non-interest income would have declined 5.0% and 1.9%, respectively.
- Net interest income declined 2% yoy despite of margin expansion by 1bps yoy. 1Q16 NIMs at 1.68% (2Q15: 1.67%).
- NPL was higher yoy at 1.15% (2Q15: 0.69%).
- Maintain "NEUTRAL” with a higher target price of S$8.14 (previously S$8.07), pegged at unchanged 0.95x FY16F book value (excluding preference shares).
Loans continue to decline without respite.
- OCBC’s customer loan book declined 1.25% qoq led by General Commerce loans, Manufacturing loans, Transport, storage and communication loans and Construction loans.
- Chinese loans continue to decline as clients switch to borrow in onshore RMB because the onshore rates are lower compared to offshore RMB.
- We believe that the combination of a weak economic outlook and desire to prioritise quality over quantity of loans would weigh on loans growth this year.
NIMs compressed 7bps qoq.
- In order to improve liquidity in during the period leading to Brexit, fixed deposits and CASA increased 1.6% qoq to S$246mn. This caused interest expense to increase and compress NIMs. The decline in SOR and SIBOR in 2Q16 also added downward pressure on NIMs.
- We see that the confluence of low rates, low loans growth and pressure to increase liquidity on the liability side of the balance sheet would not bode well for OCBC’s NIMs this year thus hurting profitability.
NPL rose 11bps qoq.
- New NPL formation was contributed by Oil and Gas sector and a Chinese SOE in the manufacturing sector. The loans exposed to the Chinese SOE were restructured and payments are on schedule.
- Management explained that they use a conservative approach to recognise new NPL. Management would start recognising NPL on loans that may require restructuring on the repayment schedule and not just when a loss given default scenario happens.
- Owing to OCBC conservative approach to recognising NPLs, we believe that the allowance cover of 100.1% in 2Q16 (allowance cover in 1Q16 is 112.8%) is not over alarming.
Investment Actions
- Maintain "NEUTRAL” with a higher target price of S$8.14 (previously S$8.07). Our revised TP is based on 0.95x FY16F book value (excluding preference shares).
- We believe that the negative effects of weak demand for credit amidst a weak economy together with management’s decision to prioritise quality over quantity of loans would impact earnings growth in FY16.
Jeremy Teong
Phillip Securities
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http://www.poems.com.sg/
2016-07-29
Phillip Securities
SGX Stock
Analyst Report
8.14
Up
8.07
