OCBC - RHB Invest 2016-07-08: Heightened Systemic Risk To Loan Growth

OVERSEA-CHINESE BANKING CORP OCBC O39.SI

OCBC - Heightened Systemic Risk To Loan Growth

As Brexit may lead to a weaker global economic environment, we cut this year's loan growth assumption for OCBC to 1.5%.
Whilst its NPL ratio may only inch up in 2Q16, we see further deterioration in 2H16. Thus, we assume a higher 1.4% NPL ratio by end-2016 (1Q16: 1%).
We also cut our 2016-2017F net profit by 6%/12% respectively.

Maintain NEUTRAL, while our TP slips to SGD8.68 (from SGD9.50, 1% downside) on the back of higher loan loss provisioning and weaker loan expansion.

Asset quality to decline in 2Q16, and non-performing loan (NPL) ratio to rise further over subsequent quarters. OCBC's oil & gas exposure remains challenging, although 61% of this segment’s NPLs are current. Other loan segments still have relatively healthy asset quality. Thus, we expect 2Q16 asset quality to only deteriorate marginally from 1Q16 levels (1Q16 NPL ratio: 1%).
However, with Brexit and indicators like Singapore’s Purchasing Managers Index (PMI) contracting for 12 straight months, we expect the bank’s NPL ratio to increase in subsequent quarters to 1.4% by end-2016. Our 2016 credit cost assumption rises to 41bps (from 29bps). This is consistent with Moody’s recent downgrading of its outlook on Singapore banks.

Management is guiding for low single-digit loan growth for 2016. In light of weakening systemic loan growth of -1.2% YTD for end-May domestically (although there was a MoM rise of 0.5%), we lower this year’s loan growth forecast to 1.5%.
Our loan growth forecast for next year is also at an unexciting 3% (from 4.5% previously).

Management is guiding for 1Q16 NIM of 1.75% to be sustained for the rest of 2016. With Brexit, the market expects the US federal funds rate to increase at a slower rate while the Singapore Interbank Offered Rate (SIBOR) may stay flattish for a longer period.
We expect 2016 NIMs of 1.75%. However, we expect the increase in the SIBOR to help lift 2017 NIMs to 1.80%.

GEH’s 1Q16 non-operating profit was negative due to widening credit spreads and lower equity prices. As at end-June, the 10-year SGS recorded a 30bps QoQ fall in yields to 1.47%, whilst the FTSE Straits Times Index (FSSTI) was flat QoQ, pointing towards a likely QoQ improvement.

Our earnings forecasts, which factored in OCBC’s guidance of a 40-45% cost-to-income ratio (CIR), are below consensus’ estimates. Our GGM-derived TP also drops to SGD8.68.
Key assumptions are 10.1% cost of equity and 10% ROE. Our TP also reflects a 2016F P/BV of 0.98x (5-year historical mean: 1.25x) and 10.3x P/E (5-year historical mean: 9.9x).
Risks include higher-than-expected impairment charges and weaker-than-expected NIMs. This report marks the transfer of coverage to Leng Seng Choon.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-08

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 8.68 Down 9.50