OCBC - CIMB Research 2017-02-14: Oil & gas troubles remain

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - Oil & gas troubles remain

4Q16 net profit of S$789m was a slight miss on higher provisions for oil & gas. FY16 net profit formed 99%/98% of our/consensus forecasts.
NIM remained subdued (+1bp qoq to 1.63%) as customer loan spreads slipped for the fourth quarter. Loans grew 3% qoq in constant currency and 2% ex-Barclays.
Provisions rose to 57bp of loans on higher SPs (44bp) for oil & gas accounts.

ROE of 8.8% was the lowest quarterly figure since 4Q08.
Maintain Reduce. We tweak our FY17-19 EPS forecasts for loan growth, WM fees and provisions. Our GGM-based target price rises to S$8.83 (0.98x CY17 P/BV).

4Q16 net profit fell 16% qoq and 18% yoy, as higher loan growth (3% in constant currency, 2% ex-Barclays), wealth management (WM) fees (+12% qoq, +47% yoy) and property disposal gains (+60% qoq, +97% yoy) could not offset the higher provisions (+84% qoq, +57% yoy) and lower insurance profit (-12% qoq, -39% yoy).
Total credit costs rose to 57bp (3Q16: 32bp) on higher SPs (44bp), most of which were for oil & gas.
Coverage ratio stayed low at 100% (3Q16: 101%). ROE dipped to disappointing 8.8%.

NPL ratio rose to 1.26% (3Q: 1.19%) due to oil & gas. In 2016, oil & gas added S$487m in net new NPLs (60% of total); we think half occurred in 4Q16.
There was migration of NPAs into the >180 days overdue category, which now forms 53% of total NPAs (3Q16: 43%).
Housing loans saw NPL ratio inch up from 0.6% to 0.7% due to a few large accounts in Sentosa.
Management remains watchful of its exposure to retail, F&B and commodity processing, which could be affected by an economic slowdown.

Management said that additional provisions are being set aside for:
1. lower collateral values,
2. shorter charter contracts,
3. lower charter rates,
4. spillover effects from negative developments in the same group of companies.
It expects the sector to remain under stress until charterers enter into longer term contracts (when oil sustains above US$60/bbl) and when there are more capital injections in the sector to help oil & gas companies modify their capital investments for more viable purposes amid overcapacity.

OCBC expects loan growth of 5% in 2017 with demand from Singapore corporates’ overseas investments.
While 90% of its loans are floating, tightening credit spreads could cap NIM upside; it expects 2017 NIM to be sustained at least at 2016’s level of 1.67%.
Fees could be driven by the Barclays integration, which added US$13bn in AUM.
Despite the better topline growth, we think net profit could be clouded by higher provisions, both for oil & gas and as asset quality deterioration broadens.

With the overhang from oil & gas unlikely to be removed in the short to medium term, we expect provisions to remain high and erode the benefits of higher rates. 4Q16 showed the impact of higher provisions on ROE, which fell to 8.8% - the lowest since the GFC.
We raise our FY17-19F EPS forecasts by 1-4% for higher loan growth and WM fees, offset by higher provisions. Our GGM-based TP rises to S$8.83 (0.98x CY17 P/BV).
Maintain Reduce. Upside risk could come from near-term sustained recovery in oil price.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-02-14

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 8.83 Up 8.180