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

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).



Outlook. 

  • 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%.


Lower 2016 NIM. 

  • 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.

With NPLs seen to rise, its loan loss coverage may fall further. 

  • 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.


Asset Quality

  • 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.


Wealth management

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


Net interest margin

  • 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


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