OCBC - DBS Research 2017-07-28: Bank On Wealth

OCBC - DBS Vickers 2017-07-28: Bank On Wealth OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - Bank On Wealth

  • NIM tracking well, strong non-interest income traction; stable asset quality indicators.
  • Loan growth surprised; 2Q17 loan growth at 2% q-o-q, 11% y-o-y, 4% YTD.
  • Earnings raised by 2-8% across FY17-19F on higher non-interest income prospects particularly wealth management and insurance.
  • Upgrade to BUY, TP raised to S$12.80 post earnings revision and rolling forward valuation base to FY18.

Improving prospects; upgrade to BUY. 

  • Expectations on rising interest rates continue to push up valuations. OCBC’s key differentiating factor lies in its insurance business which gives it a more holistic wealth management platform, which we believe the market may still be under-appreciating. 
  • Solid 2Q17 earnings were testimony of its non-interest income franchise. 
  • An 18-Sct interim dividend was declared in 2Q17.

What's New: Solid 2Q17 results; better prospects ahead 

Highlights Solid 2Q17 earnings. 

  • OCBC's 2Q17 net profit of S$1,083m (+11% qo-q, +22% y-o-y) was driven mainly by strong non-interest income from the wealth management and insurance businesses. 
  • NIM rose 3bps q-o-q to 1.65% from gapping opportunities and higher loan-to-deposit ratio, with loan growth outperforming deposits growth. However, this was 3bps lower y-o-y as interbank rates were lower compared to a year ago. 
  • Loan growth was strong at 2% q-o-q, 11% y-o-y from trade loans, loans for business investment overseas and housing loans. 
  • Deposit growth was skewed towards low cost deposits – CASA. 
  • Expenses were higher with additional staff cost from the Barclays acquisition while technology-related costs remained high. With a strong income growth, cost-to-income ratio eased to 41%.

Strong wealth management and insurance contributions.

  • The key highlight of OCBC’s 2Q17 earnings was its sustained wealth management income momentum, comprising 33% of total income. 
  • Bank of Singapore’s (BOS) assets under management (AUM) rose 47% y-o-y to US$89bn. 
  • In addition, favourable market conditions saw the non-operating income of Great Eastern Holdings (GEH) rise significantly.  GEH's underlying business was strong with total weighted net sales and new business embedded value (NBEV) rising by 6% y-o-y and 17% y-o-y respectively. NBEV margin rose to 47% from 42% a year ago, driven largely by its agency and bancassurance distribution channels.

Asset quality stabilised. 

  • Provisions were stable q-o-q although higher y-o-y. Specific provisions were lower but was made up by higher general provisions following a strong loan growth.
  • Compared to peers, OCBC did not release any general provisions to offset specific provisions. Absolute NPLs and NPL ratio remained stable. NPL ratio stood at 1.3%. New NPL formation was a little higher q-o-q due to the reclassification of its Hong Kong loan book to follow the stricter Singapore classification of NPLs. Loan loss coverage stayed at 101%.
  • OCBC’s oil & gas exposure declined by 8% to S$15.8bn or 6.9% of total loans (1Q17: S$17.1bn/7.6% of total loans) due to repayments. NPL ratio for the oil & gas segment improved correspondingly to 0.59% from 0.62% a quarter ago. A third of its oil & gas NPLs are still being serviced.
  • OCBC’s commodity exposure has also reduced from S$16.4bn to S$15.8bn with NPLs being low at 0.18%.
  • OCBC’s non-oil & gas portfolio remained stable at 0.63% within the 0.5-0.7% guidance).

Regional operations did relatively well except Malaysia.

  • Stripping off a tax writeback in 2Q16, OCBC-WHB’s pre-tax profit grew 3% y-o-y in 2Q17. The Hong Kong NIM slacked due to the gap between 1-month HIBOR (used to price loans) which was lower vs 3-month HIBOR (used to price deposits).
  • OCBC Malaysia saw some NPL slippage in its SME and housing loans. Meanwhile, OCBC NISP remained the star of OCBC’s regional operations with a 24% y-o-y earnings growth from better revenues.

Stable dividends; capital levels dipped a little. 

  • OCBC declared an 18-Sct interim dividend, similar to the quantum last year.
  • The scrip dividend scheme is not applicable. Management remains comfortable with its current fully loaded CET1 ratio of 12% although lower than peers as it continuously reviews its investment portfolio and risk-weighted assets. 
  • Capital ratios dipped a little this quarter due to higher risk-weighted assets following a stronger loan growth (higher credit risk).


Improving prospects. 

  • OCBC’s CEO, Mr Samuel Tsien’s tone sounded a little more positive during the 2Q17 analyst briefing compared to the last quarter where he articulated that the bank remained cautious on the outlook for the oil & gas segment. 
  • The oil & gas segment is expected to still stay challenging so long as oil prices hover around the US$50bbl level. While he still echoed a similar cautious view on this segment, we noted that there was a positive vibe when it came to business sentiment overall where improvements were noted. 
  • OCBC’s regional operations have done well and are expected to stride on well albeit a slight dampener seen in its Malaysian business.

NIM guided to be flat from FY16; sticking to mid-single-digit loan growth guidance for FY17. 

  • NIM is expected to pick up slightly from current levels, possible loan re-pricing following rate hikes and from stronger loan demand. Management has guided for NIM to hover around 1.67-1.68% – levels seen towards the end of 2016. 
  • Loan growth has picked up but management has stuck to a conservative guidance of mid-single-digit loan growth. 
  • Our FY17F NIM is toned down to 1.68% (from 1.71%) but we raised loan growth to 7% (from 5%) following a strong loan growth momentum noted YTD up to 2Q17 of c.4%. Loan growth is driven by trade loans, overseas business investment loans and housing loans.

Optimising capital levels. 

  • Capital levels are expected to be well managed with a more efficient use of capital and as the bank moves towards growing higher quality loans as well as gearing up its non-interest income franchise (wealth management) which utilises less capital. 
  • The scrip dividend scheme may be called back if there are new business opportunities and if Basel 4 requires additional capital from higher risk-weighted assets.

Earnings raised by 2% for FY17F, 6-8% for FY18-19F; backloaded NIM uplift, stronger loan growth and improved non-interest income traction. 

  • OCBC’s NIM continues to chug along but momentum is slow following a weak start in 1Q17.
  • SOR rose but has slipped back to end-2016 levels while SIBOR is finally creeping up, > 10bps above end-2016 levels. 
  • Sustained upward trajectory of SIBOR could re-rate NIM higher. We toned down our FY17F NIM to 1.68%, flattish from FY16, in line with management guidance, but backloaded NIM upside to FY18-19F, expecting it to rise by 3bps per year, with a view that SIBOR would rise on a sustainable trend and loans repriced accordingly with gapping profits as a wildcard. 
  • OCBC’s YTD loan growth of 4% is promising, prompting us to raise our FY17F loan growth to 7% (from 5%). Our FY18-19F loan growth is now at 5% (from 4%). We also raised our non-interest income forecasts following a stronger-than-expected momentum observed up to 2Q17. 
  • Overall, our FY17F earnings is marginally raised by 2% after trimming NIM but raising loan growth and non-interest income. 
  • Our FY18-19F earnings forecasts are raised by 6-8% from higher NIM, loan growth and sustained improvement from wealth management and insurance. Our earnings forecasts remain above consensus.

Added catalyst. 

  • Asset quality issues pertaining to the oil & gas segment have been dealt with, and sufficient provisions are said to have been made. 
  • A visible improvement in asset quality contrary to stabilisation could mark an added re-rating catalyst apart from better NIM, loan growth and non-interest income prospects.

Where we differ: 

  • Earnings raised by 2% for FY17F, 6-8% for FY18-19F; backloaded NIM uplift, stronger loan growth and improved non-interest income traction. 
  • OCBC’s NIM continues to chug along but momentum is slow following a weak start in 1Q17. SOR rose but has slipped back to end-2016 levels while SIBOR is finally creeping up, >10bps above end-2016 levels.


Upgrade to BUY, Target Price raised to S$12.80. 

  • Our TP is raised to S$12.80 (11.5% ROE [raised], 3% growth, 9.5% cost of equity) following our FY17-19F earnings adjustments as well as rolling forward our valuation base to 2018; equivalent to 1.3x FY18 BV, its 10-year mean P/BV multiple.

Key Risks to Our View

  • Faltering NIM and non-interest income traction. Inability to see revenue generation from improved NIM as well as better wealth management and insurance income contribution could pose downside to our earnings forecasts.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2017-07-28
DBS Vickers SGX Stock Analyst Report BUY Maintain HOLD 12.80 Up 10.300