OCBC - CIMB Research 2016-10-28: Excluding GEH, banking operations remain weak

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - Excluding GEH, banking operations remain weak

3Q16 net profit of S$943m topped our estimates (S$845m) and Bloomberg consensus (S$885m). 9M16 net profit formed 77% of our and consensus forecasts.
Earnings outperformance came from higher profit from life assurance (+52% qoq), and other income (+56% qoq) on better trading and gain on sale of properties.
Net interest income fell 2% qoq on lower NIM (-6bp qoq).
Upstream oil & gas loans fell to S$5bn (2Q: S$6bn) and NPL ratio was 18% in 3Q (2Q: 12%).

Maintain Reduce as we think asset quality concerns are not fully priced in. Our GGM target price rises to S$8.18 (0.91x CY17 P/BV) as we roll over to CY17F.

3Q16 net profit of S$943m (+7% qoq, +5% yoy) beat expectations due to two non-NII items:
1. other income (+56% qoq, +24% yoy), which was boosted by higher trading income and a S$51m property disposal gain, and
2. profit from life assurance (+52% qoq, +165% yoy), as GEH contributions were lifted by unrealised mark-to-market gains in its non-par fund.
Excluding GEH, net profit from banking operations remained weak, falling 3% qoq and 8% yoy. We do not view this as quality earnings outperformance.

NII fell 2% qoq and 6% yoy in 3Q16. NIM fell 6bp qoq to 1.62%, which management explained was due to sharper decline in SOR (on which loans are priced) vs. SIBOR (on which deposits are priced).
Loans grew 2% qoq (1% in constant currency), as Greater China loans stabilised after several quarters of decline from lower demand for offshore financing. LDR inched up to 83.1% (2Q: 82.2%).
OCBC guided for low-single-digit loan growth in 2016-17 and for NIM to improve if the gap between SIBOR/SOR narrows.

Group NPL ratio rose to 1.19% (2Q: 1.14%), as higher oil & gas NPL ratio of 0.53% (2Q: 0.45%) more than offset lower NPL ratio of 0.66% (2Q: 0.70%) for the rest of the book.
New NPA formation halved qoq to S$497m (of which, S$214m from oil & gas), but there were fewer recoveries. Total oil & gas exposure fell to S$14.1bn (2Q: S$14.3bn) and upstream oil & gas loans fell to S$5bn (2Q: S$6bn).
Upstream NPL ratio was 18% in 3Q (2Q: 12%) but we think this could rise as more corporates request loan restructuring.

32bp in credit cost was below expectations, and as a result the allowance coverage ratio of 101% in 3Q (2Q: 100%) was a disappointment and causes us discomfort in view of rising NPLs.
Oil & gas troubles continue as charter contracts are renegotiated at lower rates and collateral values written down.
Other areas that OCBC is monitoring are: 1) SME, 2) retail, 3) F&B, and 4) small trading companies.
Taking these into account, management expects its peak NPL ratio to remain below the 1.8% it saw during GFC.

We tweak our FY16-18F EPS for higher GEH contributions, higher wealth management fees from the integration of Barclays and higher provisions.
Our GGM target price inches up to S$8.18 (0.91x CY17 P/BV) as we roll over to CY17.
We maintain Reduce, as we think its premium valuation of 1x CY17 P/BV versus peers’ 0.9x P/BV is unwarranted, given similar ROEs.
Upside risk is faster recovery in oil & gas NPLs, while downside risk could come from broadening of NPLs amid prolonged economic slowdown.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-10-28

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 8.18 Up 8.110