OCBC - CIMB Research 2017-07-28: 2Q17 Accelerating Earnings Momentum

OCBC - CIMB Research 2017-07-28: 2Q17 Accelerating Earnings Momentum OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - 2Q17 Accelerating Earnings Momentum

  • OCBC's 2Q17 net profit of S$1,083m (+22% yoy, +11% qoq) was 19% above our expectation (S$912m) and consensus (S$898m). 1H17 net profit formed 54% of our FY17F.
  • 2Q17 earnings beat came from stronger wealth management and GEH, resulting in strong ROE of 11.9% (1Q17: 10.8%). 1H17 DPS of 18 Scts was declared, stable yoy.
  • NII rose 7% yoy in 2Q17 as gross loans increased 11% yoy. NIM improved 3bp qoq to 1.65% in 2Q17.
  • 2Q17 asset quality was stable qoq, with NPL ratio unchanged at 1.3%. Management believes the conditions in the O&G sector have stabilised.
  • Maintain our Hold recommendation on OCBC, given the recent run-up in share price.

Robust quarter led by wealth management… 

  • Qoq trends in 2Q17 were more of the same as OCBC maintained its earnings momentum since the end of FY16. 
  • 2Q17 earnings beat came from the usual suspects. 
  • Wealth management fees grew 45% yoy, partly due to inorganic contribution from Barclays wealth investment management (WIM, acquired in Nov 2017) and organic growth from both the Barclays and Bank of Singapore (BOS) franchises. 
  • BOS increased its AUM to US$89bn at end-2Q17, up 5% qoq. CIR trended down to 41.4% in 2Q17 (1Q17: 43.3%).

… and Great Eastern Holdings 

  • Meanwhile, 2Q17 operating profit from life assurance was up 123% yoy. 
  • Great Eastern Holdings (GEH) recorded strong operational performance as total weighted new sales (TWNS) and new business embedded value (NBEV) grew 6% yoy and 17% yoy, respectively, in 2Q17. Hence, we expect the positive underlying trend of the insurance business to sustain. 
  • GEH’s investment portfolio also benefited from the narrowing of credit spreads and gains from favourable interest rate movements in 2Q17.

NM improved 3bp qoq and we expect it to inch up 

  • 2Q17 NII rose 7% yoy as gross loans increased 11% yoy/2% qoq, driven by trade, clients going abroad and housing loans. 
  • NIM improved 3bp qoq to 1.65% due to higher gapping income and LDR of 85.2% (1Q17: 83.6%). Management sees room for LDR to increase, and kept its FY17F guidance of single-digit loan growth and 1.66-1.67% NIM. 
  • We expect NIM to rise in FY17F as Hong Kong NIM normalises (50bp gap between 1M/3M HIBOR that loans/deposits are priced off), LDR rises and US$ rates pass through to S$-rates.

Asset quality was stable qoq 

  • Net allowances were flat qoq, at S$169m in 2Q17, with specific provisions (SP) at 19bp of loans and general provisions (GP) at 10bp (up 3bp qoq, in line with loan growth). 
  • Asset quality was stable qoq, with NPL ratio unchanged at 1.3%. Non-performing assets (NPAs) were stable qoq at S$2.92bn in 2Q17 vs. S$2.87bn in 1Q17, while allowance coverage was maintained at 101%. 
  • While management believes the conditions in O&G sector have stabilised, there are still concerns about lingering O&G exposure.

Maintain Hold with higher target price 

  • We maintain our Hold rating. However, we raise our GGM-based target price (to S$11.98, implied 1.3x CY17F P/BV, in line with long-term average) as we realign our Singapore discount rates. 
  • We also increase our FY17-19F EPS by 3-4% to reflect stronger non-NII, lower FY17F CIR (from 44.3% to 43.0%) and higher FY17F loan growth assumption of 6% (previously, 5%). 
  • Upside/downside risks are higher/lower SIBOR and oil prices.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-28
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 11.98 Up 9.940