OVERSEA-CHINESE BANKING CORP
O39.SI
Oversea-Chinese Banking Corp (OCBC SP) - 2Q17: Broad-based Growth; Higher CASA Ratio
- 2Q17 earnings beat our expectations by 14%. OCBC achieved broad-based loan growth, NIM expansion and growth momentum for wealth management.
- We see further NIM expansion in 2H17 due to improvement in Hong Kong and recent gains in SIBOR and SOR.
- Restructuring at Great Eastern Malaysia to comply with limit on foreign ownership could generate capital for re-investment in core commercial banking franchise.
- Maintain BUY with a higher target price of S$13.38.
RESULTS
- Oversea-Chinese Banking Corporation (OCBC) reported a strong net profit of S$1,083m for 2Q17, up 22% yoy and 14% above our forecast of S$945m.
Diversified loan growth.
- Loan growth accelerated to 11% yoy (1Q17: 8% yoy). Loans from Singapore, Indonesia and Greater China grew 8.1% yoy, 16.7% yoy and 13.4% yoy respectively.
- NIM expanded 3bp qoq to 1.65%, loan yield expanded 3bp to 3.04%, gapping income rose and loan-to-deposit ratio gained 3ppt to 85.2%. Savings and current accounts grew 15.7% and 8.1% yoy respectively while CASA ratio improved 1.6ppt yoy to 50.9%.
Investors on risk-on mode.
- Fees grew 18% yoy with strong contribution from wealth management (+45% yoy).
- Bank of Singapore’s AUM increased organically by 13% to US$89b in 1H17. It has benefitted from upbeat risk-on sentiment, launch of bespoke funds and growth from Southeast Asia and Greater China.
Robust non-interest income.
- Contributions from life insurance doubled yoy to S$240m. Weighted new sales grew 6% yoy while new business embedded value expanded 17% yoy.
- Net trading income was stable at S$140m. Contributions from associates grew 17% yoy to S$119m due to growth at Bank of Ningbo.
Stabilisation in asset quality now well established.
- NPL ratio was unchanged at 1.25%. Provisions of S$169m and stayed relatively unchanged qoq.
- OCBC declared an interim dividend of 18 cents/share, unchanged yoy. Scrip dividend is not applicable for the interim dividend.
STOCK IMPACT
Broad-based growth; higher CASA ratio.
- OCBC achieved broad-based growth in loans, improvement in NIM and continued growth from wealth management. The stabilisation in asset quality has become an established trend.
- Recent increases in SIBOR and SOR augur well for further NIM expansion in 2H17.
- The continued rise in CASA ratio accompanied by strong growth in savings deposits is also encouraging.
HIGHLIGHTS FROM RESULTS BRIEFING
Anticipate further NIM expansion in 2H17.
- NIM for Hong Kong has so far not benefitted from the rise in HIBOR. 3M HIBOR has increased more than 1M HIBOR. However, OCBC’s loans are pegged to 1M HIBOR while deposits are pegged to 3M HIBOR.
- Management expects NIM to further improve in 2H17 as this impediment would be sorted out. Recent gains in SIBOR and SOR also augur well for further NIM expansion.
- Management guided for NIM of 1.67-1.68% for 2017, higher than the 1.67% for 2016.
Loan growth was broad-based.
- Loan growth of 11% yoy in 1Q17 was driven by trade finance, overseas investments and housing loans. Loans for Greater China grew 13% yoy due to recovery in trade finance.
- Network customers within Southeast Asia are expanding overseas. OCBC has financed commercial and hospitality properties in Sydney, London and New York. Management targets new housing loans of S$3b for Singapore in 2017.
One Belt One Road (OBOR) projects.
- OCBC has presence in 18 countries among the 64 OBOR countries. It focuses on OBOR projects in Malaysia, Indonesia, Vietnam and Myanmar.
- It has completed financing for four power plants (three in Indonesia and one in Vietnam) and a water treatment plant (Singapore). It is working to finance one power plant in Myanmar.
- In future, OBOR would move beyond infrastructure to other arenas.
Positive outlook.
- Management sees improvement in business sentiment in key markets, which should result in moderate GDP growth and sustainable demand for credit/loans.
- Management maintained guidance of single-digit loan growth (does not expect doubledigit loan growth).
- Management is currently evaluating the various alternatives for Great Eastern to comply with regulations on the foreign ownership limit in Malaysia.
EARNINGS REVISION/RISK
- We raise our net profit forecasts for 2017-18 by 5.9% and 2.7% due to the better performance in 2Q17 and NIM expansion.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$13.38 is based on 1.39x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.2%, COE: 7.75% (Beta: 1.05x) and Growth: 1.0%).
- The stock provides a decent dividend yield of 3.1%.
SHARE PRICE CATALYST
- NIM expansion in 2H17.
- Continued investment in core commercial banking with proceeds from restructuring at Great Eastern Malaysia.
- Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2017-07-28
UOB Kay Hian
SGX Stock
Analyst Report
13.38
Up
13.000
