OCBC - RHB Invest 2016-10-28: Expect More Pain From Oil & Gas Loans

OCBC - RHB Invest 2016-10-28: Expect More Pain From Oil & Gas Loans 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 | http://www.rhbinvest.com.sg/ 2016-10-28
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 8.81 Up 8.680