OCBC - CIMB Research 2016-12-05: Asset quality remains a concern

OCBC - CIMB Research 2016-12-05: Asset quality remains a concern OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - Asset quality remains a concern

  • We expect OCBC to see challenging topline growth amid tepid loan demand and lower Great Eastern Holdings (GEH) contributions, partially offset by the integration of Barclays private bank.
  • OCBC remains most bearish on its asset quality outlook, with potential S$1.3bn of net new NPLs should its NPL ratio rise to 1.8% (3Q16: 1.2%).
  • Maintain Reduce and GGM-based target price of S$8.18 (0.91x CY17F P/BV). 
  • OCBC remains our least preferred among the Singapore banks.

Weakest loan growth among the three banks

  • OCBC guided for 2017 loan growth to come in at the low single-digit range, similar to 2016. While the contraction in China trade loans appears to have bottomed with stabilisation in the SHIBOR and CNH HIBOR, we see limited upside to loan growth as OCBC has pulled back on lending to customer segments it is unfamiliar with.
  • DBS and UOB appear to have done better in funding chunky overseas property investments, especially in the financial institution space. On the other hand, OCBC’s loan growth is still mostly coming from domestic mortgages as loans are drawn down when properties near completion.

GEH could disappoint in the near term

  • OCBC’s strong 3Q16 performance was almost entirely due to GEH – net profit grew 7% qoq, but core banking profit excluding GEH was actually down 3% qoq.
  • GEH did well in 3Q as its non-par fund saw unrealised mark-to-market gains in both its equity and bond portfolios. We think some of these gains could reverse in 4Q as higher yields could have a negative impact on bond prices.

Barclays acquisition could be the saving grace 

  • OCBC’s best bet in driving non-NII growth is through its wealth management outfit, with the help of its acquisition of Barclays's wealth and investment management business in Singapore and Hong Kong.
  • We expect Barclays’s asset under management (AUM) of US$18.3bn to drive a 33% increase in Bank of Singapore’s AUM to US$73.3bn, assuming no attrition. The deal is slated to close by end-2016 and be EPS and ROE accretive after one year.

Most bearish on asset quality

  • Among the three banks, OCBC’s guidance on asset quality appears most bearish. It is the only bank that thinks the worst of the oil & gas credit cycle is not over yet as sector worries continue to deepen. It expects to keep its NPL ratio below the 1.8% it saw during the GFC, but this is still a far cry from its current 1.2% and implies potential net new NPLs of S$1.3bn.
  • Poorer asset quality could take an immediate hit on the bottomline if OCBC intends to maintain a minimum 100% coverage ratio (3Q16: 101%). Further write-downs of oil & gas collateral values could also mean more specific provisions (SPs) could be required.

Remains our least preferred

  • We maintain our Reduce rating and GGM-based target price of S$8.18 (0.91x CY17F P/BV).
  • OCBC remains our least preferred Singapore bank due to its most challenging topline growth and most bearish outlook on asset quality. Its P/BV valuation also remains the highest among peers for similar ROEs in 2017.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 8.180 Same 8.180