Oversea-Chinese Banking Corp - RHB Invest 2017-02-15: Oil & Gas Provisioning Remains Challenging

Oversea-Chinese Banking Corp - RHB Invest 2017-02-15: Oil & Gas Provisioning Remains Challenging OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corp - Oil & Gas Provisioning Remains Challenging

  • We expect 2017 provisions to rise 41% from 2016’s level, as collateral values for oil & gas loans stay soft, and asset quality deterioration continues. However, we forecast 2017 NIM of 1.69% (wider than 4Q16’s 1.63%), on the back of a firmer SIBOR. 
  • With 4Q16 net profit below market expectations (though in line with ours), and a weak earnings outlook, we believe investors may stay away from OCBC pending more news flow. 
  • We therefore maintain our NEUTRAL call, tweaking our TP marginally to SGD8.90 (9% downside), from SGD8.81.

NIM to expand marginally in 2017. 

  • Management expects 2017 NIM to be wider than 4Q16’s 1.63%. The expected Fed Fund rate hikes should lead to a firmer Singapore Interbank Offered Rate (SIBOR) and help widen NIM. 
  • Further contributing to net interest income growth would be OCBC’s expectation of mid single-digit loan growth for 2017.

Expect provisions to remain high in future quarters. 

  • 4Q16 specific credit cost of 44bps was up from 3Q16’s 19bps. NPL ratio rose marginally to 1.3% (3Q16: 1.2%). 
  • Management remains concerned about the provisioning for its oil & gas loan portfolio. 
  • We believe further deterioration in oil & gas collateral values could contribute to total provisions rising by 41% in 2017 – with specific credit cost of 39bps. We forecast an end-2017 NPL ratio of 1.6%.

OCBC’s high provisioning for oil & gas suggests its peers (which have yet to release results) may do likewise. 

  • Our view remains that United Overseas Bank’s (UOB) (UOB SP, BUY, TP: SGD22.90) stronger balance sheet strength (higher GP/loan ratio) provides UOB with a cushion in such times. UOB’s share price has tracked the SG banking sector’s performance since late Jan 2017, and looking ahead, we expect it to outperform.
  • After fine-tuning our assumptions, we tweak our GGM-derived TP to SGD8.90 – factoring in 9.8% CoE and 9.5% ROE (2016 ROE was 10%) – implying 1x 2017F P/BV.


  • The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represents the upside risks.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-02-15
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 8.90 Up 8.810