OCBC - DBS Research 2016-07-29: Little to look forward to

OVERSEA-CHINESE BANKING CORP OCBC O39.SI

OCBC - Little to look forward to

2Q16 earnings were dented by lower NIM and no loan growth; slight improvement in fee income noted; provisions were lower; expenses well controlled.
New NPL formation mainly from oil & gas and a China SOE manufacturing loan; loan loss coverage fell.
Bleak outlook; flattish NIM and loan growth expected; uninspiring revenue growth led us to trim FY16-18F earnings by 6-10%; keep watch on asset quality.

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 at current levels. Higher credit costs are imputed given the vulnerability of its oil & gas exposure which currently stands at 6% of total loans.
Our earnings forecasts are trimmed on the weaker-than-expected showing of its insurance contribution mainly from mark-to-market losses but we are cognisant that the underlying business measured by total weighted new sales and new business embedded value remains robust.
We have also lowered loan growth to just 1% on the bank’s cautious stance towards booking new business.

2Q16 earnings below consensus expectations.
NIM fell steeper than expected at 7bps q-o-q from lower asset yields (both loans and securities) while loans contracted by 1% q-o-q. Non-interest income was lifted by credit card fees and wealth management, while expenses were well controlled.
Meanwhile, provisions were lower but NPL ratio rose to 1.1%. New NPL formation stood at S$924m arising mainly from the oil & gas sector and a China SOE manufacturing company. Oil & gas exposure stood at 6% of total loans.
An interim DPS of 18 Scts was declared but the scrip dividend is not applicable this round. Capital ratios are strong.

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.

Our S$8.40 TP that implies 0.9x FY16F BV is derived from the Gordon Growth Model after imputing an earnings cut.
Valuations could be held up by dividend yield of 4%.
There is no catalyst and we believe the stock will likely trade range-bound until a new catalyst emerges for the Singapore banks.

Further 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 commodity segments could pose downside risk.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-07-29

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 8.40 Down 9.40