OVERSEA-CHINESE BANKING CORP
O39.SI
OCBC - Expect More Pain From Oil & Gas Loans
- We expect further deterioration in asset quality, with OCBC’s NPL ratio seen to hit 1.4% by end-2016 (from 3Q16’s 1.2%).
- We expect NIM to remain squeezed in 4Q16, though the anticipated Fed Funds rate hike in December should help to widen 2017 NIM.
- With 3Q16 net profit in line, we raise 2016F net profit by a marginal 3%, on higher forecast non-interest income.
- Maintain NEUTRAL and GGM-derived TP of SGD8.81 (3% upside).
NIM likely to expand in 2017.
- Management expects NIM to stay narrow for 4Q16, though the widely-expected December Fed Funds rate hike should widen 2017 NIMs.
- OCBC also guided for low single-digit 4Q16 loan growth.
Expect further increases in NPL ratio.
- 3Q16 credit cost of 31bps was up from 2Q16’s 12bps, which is lower than our expectation. As NPL ratio rose to 1.2% (2Q16: 1.1%), LLC was flattish at 101% as provisions doubled QoQ (though provisions were below our expectations).
- Our view is that further deterioration in oil & gas asset quality could contribute to total provisions rising by 54% in 2017, which would be a drag on earnings. We assume a 1.4% NPL ratio by end-2016.
- Our GGM-derived TP of SGD8.81 factors in 10.4% cost of equity and 10% ROE (3Q16 ROE was 10.8%).
- The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs.
- The converse represents the upside risks.
3Q16 net interest income fell 2% QoQ.
- While there was a 2% sequential loan expansion (with general commerce rising 7% QoQ), this was more than negated by 3Q16 NIM of 1.62% being 6bps lower QoQ, and 4bps lower YoY.
- The narrower NIM was due to a lower YoY average LDR ratio and reduced customer yields.
Leng Seng Choon CFA
RHB Invest
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http://www.rhbinvest.com.sg/
2016-10-28
RHB Invest
SGX Stock
Analyst Report
8.81
Up
8.680
