OVERSEA-CHINESE BANKING CORP
OCBC
O39.SI
Oversea-Chinese Banking Corp (OCBC SP) - 2Q16: The Early Bird Catches The Worm
- Net interest income declined 1.7% yoy due to hefty NIM compression of 7bp qoq.
- Fees rebounded 11.5% qoq while net trading income was stable at S$123m.
- There are early signs that OCBC’s conservative approach to recognise NPLs early is working.
- An oil & gas loan in Malaysia that was restructured and recognised as NPL a year ago was upgraded in 2Q16. 50% of its NPLs in the oil & gas sector are not overdue.
- Maintain BUY with target price reduced to S$10.48.
RESULTS
- OCBC reported net profit of S$885m for 2Q16, in line with our forecast of S$869m and consensus estimate of S$895m.
Anaemic loan growth.
- Loans contracted by 1.2% qoq, the third quarter of sequential decline. Loan demand was weak, with Indonesia (+16.4% yoy) being the sole exception. Management is cautious on extending loans to new industry sectors. Chinese customers shied away from borrowing offshore due to lower interest rates onshore within China, resulting in a steep 21.9% qoq contraction for trade loans.
NIM compression.
- NIM narrowed by a hefty 7bp qoq to 1.68% in 2Q16. OCBC was conservative and took in surplus deposits to prepare for Brexit (parked as low-yielding interbank placements), which affected NIM by 3bp. Lower SIBOR and SOR negatively affected NIM by another 3bp.
Sequential recovery in fees.
- Fees rebounded by a healthy 11.5% qoq to S$417m on the back of growth from wealth management (+19% qoq) and credit cards (+28% qoq). Contribution from Great Eastern declined 19% yoy due to a loss of S$18.7m on the disposal of subsidiary Great Eastern Life (Vietnam) as well as unrealised mark-to-market losses from widening credit spread. Net trading income was stable at S$123m.
Strain on asset quality persists.
- NPLs increased 12% or S$267m qoq due mainly to exposure to the O&G sector. New NPLs of S$196m from Greater China was due to a Chinese SOE in the manufacturing sector undergoing restructuring. The loan has been restructured/rescheduled and OCBC has already received the first interest payment.
- NPL ratio has edged higher by 0.1ppt to 1.1%. The pressure persists but the erosion on asset quality is gradual.
Switching off scrip dividend.
- OCBC declared interim dividend of 18 S cents/share. Scrip dividend scheme is not applicable as OCBC has already caught up with peers in terms of capital adequacy with fully loaded CET-1 CAR at 12.7%.
STOCK IMPACT
Conservative approach to handle vulnerable O&G loans.
- Management was conservative to restructure/reschedule vulnerable exposure to the O&G sector a year ago and recognised them as NPLs. While the strain on asset quality persists, there are early signs that OCBC’s strategy is working as evidenced by an O&G NPL in Malaysia being upgraded to performing in 2Q16.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
No exposure to Swiber.
- Management says OCBC was not listed as a banker on Swiber's annual report, and is thus unlikely to have any exposure.
- The reduction in NPLs for Malaysia of S$279m was due to upgrade for an O&G loan, which was restructured last year in 2Q15. The loan has performed based on the restructured terms for 12 months. Visibility for future cash flows has also improved due to extension of the charter. The upgrade indicates that OCBC was conservative and prudent to restructure the loan early.
The O&G sector remains under pressure.
- Loans extended to the O&G sector were relatively unchanged at S$12.6b or 6.1%. OCBC has recognised NPLs of S$933m (1Q16: S$895m), representing NPL ratio of 7.4% for O&G loans. For the more vulnerable offshore services segment, NPL ratio is higher at 15%. According to management, 50% of its NPLs in the O&G sector are not overdue (still "performing").
- The stresses have deepened but have not broadened (new NPLs were within its watch list). Management foresee another two quarters of deterioration before the situation stabilises. OCBC could have to restructure more O&G loans and recognise them as NPLs should charterers approach vessel/rig owners to renegotiate for lower charter rates.
Stellar performance from Indonesia.
- Loans grew 16% yoy and NIM was stable at 4.62%. Net interest income expanded 39% yoy. Non-interest income also increased by a robust 50% yoy. Net profit grew 26% yoy to Rp457b, or 6% of OCBC’s group earnings. Asset quality is solid with NPL ratio at 1.4%.
EARNINGS REVISION/RISK
- We have trimmed our 2016 and 2017 net profit forecasts by 1% and 1.7% respectively due to slight easing in NIM.
VALUATION/RECOMMENDATION
- Maintain BUY. OCBC trades at 2016F P/B of 1.03x (GFC trough: 0.83x). The stock provides an attractive dividend yield of 4.1%.
- Our target price of S$10.48 is based on 1.23x P/B, which is derived from the Gordon Growth Model (ROE: 9.5%, COE: 7.8% (Beta: 1.0x) and Growth: 0.5%).
SHARE PRICE CATALYST
- Growth from regional markets in Malaysia, Indonesia and China.
- Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.
Jonathan Koh CFA
UOB Kay Hian
|
http://research.uobkayhian.com/
2016-07-29
UOB Kay Hian
SGX Stock
Analyst Report
10.48
Down
10.86
