OCBC - RHB Invest 2016-07-29: Expect Further Loan Weakness Ahead

OVERSEA-CHINESE BANKING CORP OCBC O39.SI

OCBC - Expect Further Loan Weakness Ahead

We still expect OCBC’s NPL ratio to deteriorate to 1.4% by year-end, after it ticked up to 1.1% in 2Q16.
As expected, loans were week, contracting 1.3% QoQ. While its 2Q16 credit cost of 12bps was lower than our estimate, we expect this to increase in 2H16 from asset quality deterioration in line with the economic slowdown.
Even though 2Q16 net profit was in line, we trim our FY16F net profit by 2%.

Maintain NEUTRAL, with an unchanged GGM-derived TP of SGD8.68 (2% downside).

OCBC is more cautious on its lending and is now guiding for very low single-digit 2016 loan expansion, on concerns with asset quality. As such, we cut our 2016 loan growth forecast to 0.5%, from 1.5%.

The 3.6% QoQ decline in net interest income was the consequence of a sequential decline in loans (-1.3%) and its net interest margin (NIM) narrowing by 7bps. Management indicated that China-related lending fell and that the 3bps of decline was due to OCBC conservatively raising liquidity ahead of the Brexit referendum.
It expects NIM for this year to be slightly wider than 2015’s 1.67%. We cut our 2016 NIM assumption to 1.72% (from 1.75%), as interest rates could stay low for a longer period of time.

There was a sharp decline in 2Q16 credit cost to 12bps (vs 1Q16’s 30 bps). This was below our expectations, and has led to loan loss coverage falling to 100% (from 1Q16’s 113%). We have assumed further falls in LLC going forward.
Our GGM-derived TP of SGD8.68 factors in a 10.1% cost of equity and 10% ROE. The risks to our forecast include higher-than expected impairment charges and weaker-than-expected NIMs.

OCBC management continues to see the oil and gas (O&G) space under asset quality pressure. However, its exposure to O&G is relatively small, with 6% of its loans to the O&G space, and another 6% to companies working in the commodities space. Management indicated that half of its O&G NPLs are actually still current in payments.
The bank’s total on-balance sheet exposure to the UK and Europe is SGD5.4bn in loans and SGD7.4bn in other assets. Both these account for a small 3% of total assets.

OCBC’s wealth management now has SGD61bn of assets under management, not including the Barclays business.

The weakness in 2Q16 NIM was the consequence of low NIM in May and June, whilst April’s NIM was still relatively high.
Management anticipates 2016 NIM to be slightly wider than what it was in 2015.
Our 2016 NIM forecast of 1.72% factors in a Singapore Interbank Offered Rate (SIBOR) rise in the later part of 2016.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-29

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 8.68 Same 8.68