OCBC Bank (OCBC SP) - Maybank Kim Eng 2016-10-28: Headwinds ahead

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - Headwinds ahead

9M16 core PATMI of SGD2,684m (-9% YoY) was in line with our expectation.
3Q16 core PATMI of SGD943m (+5% YoY) lifted by 25% YoY increase in non-interest income, mainly due to higher wealth management fees and GEH’s profit from life assurance.
3Q results reflected weak underlying trends:
1. net interest income -6% YoY;
2. NIM compression by 4bps YoY;
3. flat loan growth in constant currency terms;
4. broad-based migration of NPAs to worsening categories/more restructured loans (+32% QoQ); and
5. group NPLs rose to 1.2% (2Q:1.1%).

Accordingly, we cut FY16-17E net profit by ~3% mainly on slower topline growth and higher provisions. Our TP is slightly lowered to SGD7.40 based on ~0.8x FY17E P/BV.
Maintain SELL.

Out of the SGD99m of specific provisions provided in 3Q16, 30% are related to the beleaguered O&G sector (i.e. SGD33m). 43% (i.e. SGD213m) of new NPA formation of SGD497m in 3Q16 are from the O&G sector. Management shared that 60% of O&G NPLs (i.e. SGD662m) are still performing in terms of principal and interest.
While we applaud management’s more prudent approach to classify restructured loans as NPLs, we think OCBC is likely to face more headwinds in 4Q16 as more O&G corporates are now unable to pay bondholders and require debt restructuring.
In addition, NPAs with period overdue by > 90 days are now 68% of NPAs (2Q16: 53%). Cash flows in the corporate sector should stay tight without much revenue growth.
Weaker domestic and regional economy amid the turning credit cycle is likely to result in more impairment. We raise provisions by 4-10% for FY16-18E and factor in higher credit costs at 35-39bps (from 32-38bps).

We slightly lower our TP to SGD7.40 based on ~0.8x FY17E P/BV, close to 2SD below historical mean to reflect our forecast for ROE to remain below the 2008-2015 mean.
Risks to our call include:
1. NIM improvement from higher interest rates;
2. higher non-interest income; and
3. lower provisions.

Widening credit spreads from repricing of assets at higher interest rates.
Higher non-interest income from wealth management and higher contributions from GEH.
Sharp and sustained rebound in commodity prices.
Better-than-expected asset quality through proactive restructuring of loans, with no major credit slippages.
Better demand for Singapore mortgages from easing of property-cooling measures.

Oil prices stay low, sparking more NPLs in O&G support services.
Job losses in Singapore become pervasive, hurting its mortgage portfolio.
Sharp decline in value of trading securities and shocks in fixed-income portfolio.
Lack of liquidity of a funding currency.
Translation losses from MYR/IDR depreciation.
Emergence of dominant financial competitors in Singapore.
Capital-raising by peers may depress sentiment.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-28

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 7.40 Down 7.490