OCBC - CIMB Research 2017-05-09: Turning The Corner

OCBC - CIMB Research 2017-05-09: Turning the corner OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - Turning the corner

  • 1Q17 net profit of S$973m was above our expectation (S$818m) and consensus (S$845m).1Q17 net profit formed 28%/27% of our/consensus FY17 forecast.
  • The variance came from exceptional WM fees and lower specific provisions, while IB, trading and associates also did well. NPL ratio was stable at 1.3%.
  • Key disappointment was a 1bp qoq fall in NIM, which would have risen 1bp if not for a reversal of interest on NPL. A 20bp fall in CET1 CAR is expected to be temporary.
  • Upgrade to Hold from Reduce, with a higher GGM-based TP of S$9.94 (1.1x CY17 P/BV) as we raise FY17-19 EPS by 5-8% on higher non-NII and lower provisions.

Strong beat on non-NII, provisions; lower credit costs to sustain 

  • OCBC delivered a strong set of results in 1Q17, with net profit rising 23% qoq and 14% yoy to S$973m. Non-NII had a strong showing as wealth management (WM), investment banking, profit from life assurance and trading all exceeded our estimates. 
  • Total credit costs surprised on the downside at 30bp (4Q16: 57bp), driven by lower specific provisions. Management guided for credit costs to remain around 1Q levels, unlike the big spike to 57bp in 4Q. Allowance coverage inched up to 101% (4Q16: 100%).

1bp NIM contraction disappointed, but loan growth was decent 

  • The key disappointment was the 1bp qoq fall in NIM to 1.62%, due to a reversal of interest income that was recognised for an NPL. 
  • Otherwise, NIM would have risen 1bp qoq, though still lower than the 3-4bp seen at peers due to a one-off impact on HK NIM as it saw loan spreads being hit by a 50bp gap between 1M/3M HIBOR off which loans/ deposits are priced. 
  • Despite lower margins, net interest income still rose 2% qoq on higher asset volumes (loans +2% qoq) and higher LDR of 83.6% (4Q16: 82.9%).

2017 flat NIM guidance maintained; more upside ahead 

  • Management kept to its guidance of 1.66-1.67% NIM in 2017, with expansion from: 
    1. deploying excess funds from money market to loans, 
    2. absence of reversal in interest income, and 
    3. normalisation in HK NIM. This factors in two more Fed rate hikes.

Wealth management and insurance were the stars of non-NII 

  • WM fees rose 24% qoq/97% yoy to S$215m, partly boosted by Barclays (whose contribution rose 37% qoq), but still largely driven by organic growth at BOS, which drove AUM to US$85bn (+8% qoq). 
  • The better performance resulted from multiple fund launches in 1Q and the market turning to risk on mode; its sustainability depends on these factors. 
  • Profit from life assurance also did well at S$176m (+22% qoq, +112% yoy), as higher equity and bond prices lifted the performance of GEH’s non-par fund.

Asset quality stable 

  • Asset quality held surprisingly well, with NPL ratios falling across the region, though Singapore NPL ratio rose to 1.0% (4Q16: 0.8%) due mainly to oil & gas. 
  • Ex-oil & gas, NPL ratio fell to 0.63% (4Q16: 0.65%) with no “observable pressure” from new areas. 
  • OCBC also saw improved repayments from an oil & gas NPL, which moved it from the > 180 days to < 30 days overdue category. It has written down vessels by 40-45% from their original market value, and made a full recovery on a recent vessel sale in 2Q17. 

Upgrade from Reduce to Hold

  • We expect OCBC to turn the corner as credit costs appear more manageable, its wealth franchise continues to deliver and favourable market conditions will drive better GEH contributions. 
  • We upgrade from Reduce to Hold, with a higher GGM-based TP of S$9.94 (1.1x CY17 P/BV) as we raise FY17-19 EPS forecasts by 5-8% for higher non-NII and lower provisions. 
  • Upside/downside risks include higher/lower SIBOR and oil prices.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-05-09
CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 9.94 Up 8.830