OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-05-11: More Opportunities, U/G to HOLD

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - More Opportunities; U/G to HOLD

1Q17 core PATMI of SGD973m (+23% QoQ, +14% YoY) beat our expectations, meeting 27% of our previous FY17 forecast.
Similar to DBS and UOB, 1Q17 results reflected positive signs as we see potential upside to earnings and growth prospects ahead.
We raise FY17-19E core net profit by 7-16% mainly on:
1. higher loan growth assumption of c.6% (from 2-3%);
2. higher non-interest income (non-II) by 7-10% mainly from higher wealth management (WM) fees and Great Eastern (GE) contributions; and
3. lower provisions by 4-5%. Our FY17-19E credit costs are now 28–36bps (from 32- 38bps).
With the change in EPS forecasts, our assumed sustainable ROE is now 11.1% (9.8% previously), COE of 10.5% and growth rate of 3.5%. With that, our TP is raised 22% to SGD9.85, based on ~1.1x FY17E P/BV (from ~0.9x previously). U/G to HOLD.

FI lending and lending to “Rest of the World” rose 9%/8.5% QoQ respectively, mainly from corporates looking to invest in the UK, Australia etc.
We raise loan growth estimates to 6% as we think more lending opportunities could arise for further growth. However, 1Q17 NIM fell 1bp QoQ to 1.62% due to 2bps adjustment on higher non-recognition of interest income on NPLs. Excluding this, NIM would improve by 1bp QoQ, but still lower than peers’ +3-4bps.
We think margin compression will likely continue as the bank faces competitive pressures and chases after high quality credit. We expect FY17 NIM to expand slightly to 1.68% on the back of higher rates.
We think further catalysts could come from higher WM fees. Bank of Singapore’s (OCBC’s private banking arm) AUM rose decently by USD6b QoQ to USD85b. While WM fees rose 37% QoQ partly due to positive market sentiment, we think organic growth from its BOS franchise and tie-ups of product launches with its other subsidiaries, such as Lion Global Investors, makes it well-positioned in the space.
WM revenue is now increasingly important for Singapore banks to bolster earnings as they play catch-up and gain market shares from the smaller players.

We upgrade OCBC to HOLD.
Risks to our call include:
1. NIM improvement from higher rates;
2. higher non-interest income; and
3. benign credit cost.

Widening credit spreads from repricing of assets at higher interest rates.
Higher non-interest income from wealth management and higher contributions from Great Eastern.
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/ 2017-05-11

Maybank Kim Eng SGX Stock Analyst Report HOLD Upgrade SELL 9.85 Up 8.050