Oversea-Chinese Banking Corp - RHB Invest 2017-07-27: Strength From Life Assurance And Wealth Management

Oversea-Chinese Banking Corp - RHB Invest 2017-07-27: Strength From Life Assurance And Wealth Management OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corp - Strength From Life Assurance And Wealth Management

  • OCBC’s 2Q17 earnings were slightly above expectations (at 55% of pre- results FY17 forecasts). The strength came from life assurance and wealth management. 
  • The positive outlook includes NIM expansion from higher SIBOR/SOR, and continued robustness from wealth management income (which grew 52% YoY in 2Q17). However, we have assumed for the strong 2Q17 performance in GEH’s investment portfolio not to persist. 
  • We raise FY17F net profit by 7%, and lift our Target Price to SGD10.96 (from SGD10.22, 3% downside). Maintain NEUTRAL.

NIM to expand in subsequent quarters. 

  • At Oversea-Chinese Banking Corp’s (OCBC) results briefing, management guided for a 2017F NIM of 1.67-1.68%, wider than 2Q17’s 1.65%, which was 3bps wider QoQ. 
  • Further US Federal Funds rate (FFR) hike(s) should lead to a firmer Singapore Interbank Offered Rate (SIBOR), while OCBC’s low loan to deposit ratio (85.2%) should help widen its NIM. 
  • We forecast 2017 NIM of 1.67% (from 1.66%).

OCBC guided for mid single-digit 2017F loan growth. 

  • Further contributing to the NII growth would be OCBC’s expectation of a 2017F mid single-digit loan growth – we forecast 5.5%. 2Q17 loans expanded by 1.8% QoQ.
  • Overall wealth management income grew by 52% YoY, or 9% QoQ to SGD789m, and accounted for 33% of total income (up from 1Q17’s 32%). 
  • BOS saw assets under management (AUM) rising by 13% HoH to USD89bn – this excludes the inorganic expansion from the Nov 2016 acquisition of Barclays’ wealth and investment management businesses.

Expect NPL ratio to rise marginally over future quarters. 

  • 2Q17 total credit cost of 29bps was close to that of 1Q17’s 27bps. The NPL ratio of 1.3% was unchanged sequentially. Management expects a stabilisation to happen for the oil & gas loan portfolio, but does not see recovery for this segment as yet, as crude oil price remains at a low of < USD50.00 per bbl. 
  • We forecast an NPL ratio of 1.5% for the end of 2017.

Results slightly above expectations. 

  • 2Q17 net profit of SGD1.08bn was 22% higher YoY and 11% higher QoQ; 1H17 represented 55-56% of our and consensus’ pre-results 2017 net profit forecasts. The growth was mainly due to life assurance profit rising 123% YoY and wealth management fees growing 45% YoY. 
  • We raise our 2017 net profit forecast by 7% as we increased insurance income by 20%, and lowered provisions assumptions. 
  • Whilst these are positives, OCBC’s lower-than-peers’ loan loss coverage of 101% points to a risk of higher provisions, should oil prices fall.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-27
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 10.96 Up 10.22