OVERSEA-CHINESE BANKING CORP
OCBC
O39.SI
Oversea-Chinese Banking Corporation (OCBC SP) - 2Q16 Results Preview: Not Slipping In Execution
- We expect OCBC to report net profit of S$869m for 2Q16, up 1.5% qoq (1Q16: S$856m).
- Contribution from life insurer Great Eastern could be the bright spot, boosted by mark-to-market gains for its bond portfolio for Malaysia (on a rally in bonds in emerging markets post-Brexit).
- Maintain BUY. Target price: S$10.86.
WHAT’S NEW
Preview for 2Q16.
- We expect loans to have reversed from a contraction in 1Q16 (-1.2% qoq) to expansion in 2Q16, driven by growth in Singapore and Malaysia. Trade loans should have stabilised in 2Q16, unlike the massive contraction of 53.4% yoy and 22.3% qoq in 1Q16. Oversea-Chinese Banking Corporation (OCBC) should see a pick-up in loan growth in 2H16 and should be on track to meet muted guidance of low-single-digit loan growth for 2016.
- We expect NIM to have receded 3bp qoq to 1.72% due to the sharp pullback in SIBOR and SOR. 1Q16 NIM was also boosted by higher yields from interbank placements, which may not be sustainable going into 2Q16.
- Fees are expected to have declined 12.6% yoy due to lower wealth management and loan related fees. We expect a healthy contribution of S$180m from life insurer Great Eastern, boosted by mark-to-market gains for its bond portfolio for Malaysia (on a rally in bonds in emerging markets post-Brexit). We expect a stable net trading income of S$120m.
- NPL ratio is expected to be relatively unchanged at about 1% in 2Q16. Nevertheless, the oil & gas (O&G) sector is not out of the woods yet as cash flows are still under pressure despite higher crude oil prices. We expect OCBC’s NPL ratio to inch up gradually in 2H16 and 1H17 and peak at 1.6% in 2Q17. We have conservatively factored in credit cost of 36bp for 2Q16 (2Q15: 15bp, 1Q16: 30bp).
- We forecast net profit at S$869m for 2Q16, up 1.5% qoq from S$856m in 1Q16 but down 17.1% yoy from S$1,048m in 2Q15 (gains of S$136m from the divestment of an 8.2% stake in New China Life by Great Eastern, of which OCBC's share was S$105m).
STOCK IMPACT
Respectable results despite a tough environment.
- We expect OCBC to achieve credible earnings despite the difficult operating environment in 2Q16.
Anticipate recovery in trade loans in 2H16.
- OCBC was affected by lower US$- denominated lending, which contracted 13.8% yoy in 1Q16. Demand for trade loans has fallen due to the narrowing of the interest rate differential between onshore and offshore renminbi. The spread was negative in 4Q15 and 1Q16 but has normalised back to positive since mid-Mar 16, which augurs well for a recovery in trade loans in 2H16.
Prudent in recognising NPLs.
- Management is conservative and proactive in managing its exposure to the O&G sector. It has rescheduled/restructured S$895m of loans extended to the O&G sector and recognised them as NPLs. We estimate current NPL ratio for the O&G sector at 7.2%.
Joining hands for expansion in China.
- OCBC has merged OCBC Bank (China) and Wing Hang Bank (China) to form OCBC Wing Hang Bank (China), which is wholly owned by subsidiary OCBC Wing Hang in Hong Kong. The new structure empowers OCBC Wing Hang to drive OCBC's Greater China strategy across China, Hong Kong and Macau. It also allows OCBC to comply with the single presence policy for foreign banks.
- OCBC Wing Hang Bank (China)’s head office is located at OCBC Tower in the Pudong financial district of Shanghai. It has 32 branches and sub-branches across 14 cities in China, of which 13 branches and sub-branches are within the Pearl River Delta region. OCBC utilises its onshore-offshore strategy to engage customers onshore in China to service their offshore needs in trade and investment. It plans to capture flows in trade, capital and wealth due to increased connectivity between Greater China and Southeast Asia.
- For 2015, Greater China contributed 20% of group pre-tax profit, of which 8% was generated by OCBC Wing Hang. After the merger, OCBC Wing Hang’s China, Hong Kong and Macau operations would overshadow OCBC Malaysia as the largest contributor to earnings from overseas.
EARNINGS REVISION/RISK
- We maintain our earnings forecasts.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$10.86 is based on 1.26x 2016F P/B, derived from the Gordon Growth Model (ROE: 9.7%, COE: 7.8%, beta: 1.0x, growth: 0.5%).
SHARE PRICE CATALYST
- Growth from the commercial banking businesses in regional markets, such as Malaysia, Indonesia and Greater China.
- Non-interest income from wealth management and life insurance will expand in tandem with growing affluence in Asia.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2016-07-27
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