OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-02-15: Next Leg ~ Revenue Growth

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - Next Leg: Revenue Growth

We raised FY17-18E net profit by 7-9% mainly on a higher loan growth assumption of 2-3% (from ~1%), and lower costs by ~3%. We also introduce FY19 estimates.
Our TP is also raised by ~9% to SGD8.05 based on ~0.9x FY17E P/BV from ~0.8x previously. Maintain SELL.
4Q16/2016 results highlighted that revenue growth and cost containment will be priorities as banks are now operating in a challenging environment amid worsening asset quality.

Despite positive loan growth, the stable NIM reflected:
1. loan competition as banks are now going after better quality credit; and
2. increased appetite to gain market share.
Management guided FY17 NIM to be at least 1.67% or slightly better, which also seems to indicate that the pass through effect for rising SGD rates on NIM is likely to be marginal and no widening of credit spreads. This also affirms our view that competitive pressures will offset some of the benefits from the loan re-pricing interval.

With provision coverage now at 100% (down from 120% in FY15), we think higher provisions are more probable and we raised our FY17 provision assumption by ~3% as the O&G support services sector is still facing stress.
Management also shared that it is closely monitoring asset-quality deterioration in the retail, F&B and commodities processing sectors (these three sectors form ~11-12% of total loans) if the domestic economy slows down.
Our FY17-19E credit costs are now at 32-38bps.

With the change in EPS forecasts, our assumed sustainable ROE is now 9.8% (9.3% previously), COE of 10.5% and growth rate of 3.5%. With that, our TP is raised by ~9% to SGD8.05, based on ~0.9x FY17E P/BV (from ~0.8x FY17E P/BV), close to 1SD below historical mean to reflect lower ROEs.
Risks to our call include:
1. NIM improvement from higher interest rates;
2. higher non-interest income; and
3. 3lower provisions.

Widening credit spreads from repricing of assets at higher interest rates.
Higher non-interest income from wealth management and higher contributions from GEH.
Sharp and sustained rebound in commodity prices.
Better-than-expected asset quality through proactive restructuring of loans, with no major credit slippages.
Better demand for Singapore mortgages from easing of property-cooling measures.

Oil prices stay low, sparking more NPLs in O&G support services.
Job losses in Singapore become pervasive, hurting its mortgage portfolio.
Sharp decline in value of trading securities and shocks in fixed-income portfolio.
Lack of liquidity of a funding currency.
Translation losses from MYR/IDR depreciation.
Emergence of dominant financial competitors in Singapore.
Capital-raising by peers may depress sentiment.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-15

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 8.05 Up 7.400