Oversea-Chinese Banking Corp - Phillip Securities 2017-05-11: Wealth Management Beats but Competition is Heating Up

OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corp - Wealth Management Beats but Competition is Heating Up

1Q17 PATMI of S$973mn exceeded our estimate by 16%. Insurance and wealth management (WM) surprised on the upside.
All the growth in 1Q17 came from insurance and WM fee income. A flat 1Q17 net interest income growth was in line with our expectations.
Maintain "REDUCE” with an unchanged target price of S$8.48, based at unchanged 0.95x FY17F book value (excluding preference shares).

Fee and commission income was up 29% y-o-y, supported by Investment Banking (+99% y-o-y) and Wealth Management (+70% y-o-y). Profit from insurance was up 111% y-o-y and net trading income was up 30% y-o-y.
In our OCBC’s pre-earnings update report dated 16 Jan 2017, we had expected stronger WM and Life Assurance to support OCBC’s total income. But the 22% q-o-q growth from Life Assurance and 37% q-o-q growth from WM had exceeded expectations.
Moving ahead, we still expect strong growth from the two segments but we do not expect the same pace of growth to continue as these two segments are largely driven by market conditions and investor sentiments.

This was mainly due to tighter margins between non-bank customer loans and deposits partially offset by better returns from money market placements. Excess liquidity was channelled to money market placements thus volumes of these placements were higher q-o-q and y-o-y.
But management sees opportunities ahead to shift some of these placements to higher yielding non-bank customer loans to improve net interest income. But we remain cautious on that outlook as the competitive business landscape may crimp some of that potential growth.

NPLs formation was largely stable across all industries. Oil and Gas NPLs increased by approximately S$100mn q-o-q to reach S$1.4bn, representing half of total NPLs of S$2.81bn. About 37% of the S$1.4bn NPLs are still serving principal and interest repayments.
Oil and Gas offshore support vessels (“OSV”) sector loans is estimated to be S$6bn, making up 40% of the total Oil and Gas on-balance sheet exposure of S$15bn. 22% of the OSV sector loans are in NPL, which is valued at S$1.32. Therefore NPL from the OSV sector actually make up 94% of the Oil and Gas NPLs. We opine that the stability in NPL formation in the OSV sector was largely due to:
1. Deterioration in collateral values of OSVs has decelerated. Currently, management estimates OSV values have reached 40% to 45% of their original values after most of the deterioration happened in 2016.
2. Oil and Gas Customers whose loans have not deteriorated have diversified businesses. These customers are able to extract cash flow from their non-Oil and Gas related businesses to support their exposure to the Oil and Gas industry. Besides, these companies have also put up additional collateral that are not Oil and Gas related as buffer.

We see OCBC strengthening its regional corporate lending as loans to Financial Institutions, Investment and Holding company (“FIs”) and General Commerce show strong year-on-year (“y-o-y”) and quarter-on-quarter (“q-o-q”) growth. At the same time, USD loans growth has outpaced SGD loans growth q-o-q and y-o-y corroborating the stronger regional exposure. By geography, half of the q-o-q gross loans growth was contributed by growth of Singapore loans.
We believe that the FIs are OCBC’s regional network clients who book loans at the holding company level in Singapore for their overseas regional operations.
But we see stiff competition to OCBC’s regional corporate business from at least one large universal bank which is also competing in other similar areas of insurance sales and wealth management. This universal bank has a strong presence in the Pearl River Delta region in China which is also an area of interest for OCBC Wing Hang.

On the consumer loans space, we saw Housing loans decline q-o-q.
In our Banking Sector Report in April 2017, we opine that competing for market share in Housing loans will drive margins down. So we believe the growth decline is emphatic of OCBC’s reluctance to compete too aggressively. However, in view of stiff competition both in Singapore consumer and regional corporate business, we expect OCBC to tactically rotate between the two segments whenever competition recedes.
Therefore, to be ready to capture opportunities, we expect OCBC to aggressively maintain ample deposits for USD and SGD to fund loans. Besides, management also sees deposits as a marker for strong client relationship. So in order to keep customers close and keep funding ample, we expect more upward pressure on funding costs this year.

As expected, we saw unfavourable loans volume and rates dynamics suppressing net interest income growth and these conditions may continue to persist in 2017. But we also expect strong performances by OCBC’s Great Eastern Holdings and OCBC’s Bank of Singapore to support overall performance especially within the Singapore market.
But on a less optimistic note, we see strong competition in overseas markets coming from at least one large universal bank that has operations in similar markets and driving similar product strategies as OCBC.
Maintain "REDUCE” with an unchanged target price of S$8.48, based on unchanged 0.95x FY17F book value (excluding preference shares).

Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2017-05-11

Phillip Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 8.480 Same 8.480