OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-08-22: Risk On

OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-08-22: Risk On OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - Risk On


Momentum into 2H; EPS estimates and TP raised 

  • We expect earnings momentum to continue into 2H17, particularly from higher wealth management (WM) fees and insurance contributions from Great Eastern (GE) in a risk-on market environment. 
  • We raised our FY17- 19E core net profit by 1-3% on the back of higher loan growth assumption, and higher non-interest income (non-II) forecast for FY17.
  • With the change in EPS forecasts, our assumed sustainable ROE is now 11.4% (11.1% previously), COE 10.5% and growth rate 3.5% (both unchanged). 
  • Our Target Price of OCBC Bank is raised 12% to SGD11.05 after rolling forward valuations to FY18E, pegging to an unchanged ~1.1x FY18E P/BV, below its 10-year mean of 1.3x to reflect lower forecast ROEs compared to prior periods.


Greater reliance on Non-Interest Income 

  • We raised our FY17-19E loan growth forecast to 6-8% YoY (from 6% previously). We believe more opportunities could come from better economic prospects due to a trade-led growth recovery and recovery in the Singapore property market. We estimate FY17-18E NIM of 1.68%/1.69% on the back of higher rates. 
  • Buoyant market conditions in 1H led to better performance for GE, which saw non-operating profit surged 262% YoY in 1H17 (1H16: -SGD73m). However, volatile market conditions can swing earnings as OCBC has a greater reliance on non-II.


Specific provisions much lower than peers 

  • OCBC’s specific provisions (SPs) of average gross loans were lower than peers, at 19bps vs peers’ 30-39bps in 2Q17. With O&G industry dynamics deteriorating, we expect higher SPs into FY18E. 
  • We estimate FY17-18E credit costs to remain elevated at 32–36bps as tail risks from the O&G sector are not over.


Maintain HOLD 

  • OCBC share price is up 28% YTD, but we think further upside could be capped if non-II disappoints. With limited upside to our TP, we maintain HOLD.
  • Risks to our call:
    1. NIM improvement from higher rates;
    2. higher non-interest income; and
    3. lower provisions.


Swing Factors


Upside

  • Widening credit spreads from re-pricing of assets at higher interest rates.
  • Higher non-interest income from wealth management and higher contributions from Great Eastern.
  • Sharp and sustained rebound in commodity prices.
  • Better-than-expected asset quality through proactive restructuring of loans, with no major credit slippages.
  • Better demand for Singapore mortgages from easing of property-cooling measures.

Downside

  • Oil prices stay low, sparking more NPLs in O&G support services.
  • Job losses in Singapore become pervasive, hurting its mortgage portfolio.
  • Sharp decline in value of trading securities and shocks in fixed-income portfolio.
  • Lack of liquidity of a funding currency.
  • Translation losses from MYR/IDR depreciation.
  • Emergence of dominant financial competitors in Singapore.
  • Capital-raising by peers may depress sentiment.




Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-08-22
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 11.05 Up 9.850



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