OCBC - CIMB Research 2017-10-26: All Engines Purring; Upgrade To ADD

OCBC - CIMB Research 2017-10-26: All Engines Purring; Upgrade To Add OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - All Engines Purring; Upgrade To Add

  • OCBC’s 9M17 net profit of S$3,113m (+16% yoy) was broadly in line with consensus and our expectation, forming 79% of our FY17F forecast.
  • Key positives from the results briefing was guidance for FY18F loan growth to be 7- 8% yoy and moderation of NPA formation going forward.
  • There were no new updates on impact of IFRS 9 and GEH Malaysia.
  • Factoring in higher loan growth, we raise our FY17-19 EPS by 1.5-8.9%. Our GGM-based TP is raised on the back of the estimates upgrades and roll-over to FY18F.
  • With all engines purring, we upgrade OCBC to Add from Hold.

3Q17: all engines purring 

  • OCBC Bank's 3Q17 net profit of S$1,057m (+12% yoy/-2%qoq) formed 27% of our full-year forecast.
  • The group achieved ROE of 11.4%. In our view, results were positive, and demonstrated the banks’ holistic franchise in its banking, insurance and wealth management platforms.
  • A key positive from the results briefing was guidance of FY18F loan growth of 7-8% (we revise our FY18F loan growth assumption to 6%). We also believe that the oil & gas situation has stabilised and non-performing assets (NPA) formation would moderate.

Loan growth momentum expected to be sustained in FY18F 

  • 3Q17 NII grew 12% yoy to S$1,382m. Loan growth continued to be robust and broad-based, registering 11% yoy/2% qoq expansion. 
  • Given the high base in 4Q16, we expect yoy loan growth to moderate in 4Q17. Driven by housing, trade, corporates expanding overseas and Wing Hang, loan growth momentum is guided to be sustained in FY18F.

NIM improved 1bp qoq to 1.66% 

  • NIM improved 4bp yoy/1bp qoq to 1.66% due to increase in loans-to-deposits (LDR) (3Q17: 85.3%; 2Q17:85.2%; 3Q16:83.1%) as well as higher yields from money market placement. We see scope for NIM improvement with higher LDR. 
  • Due to competition, we note that loan yields remained compressed and were flat qoq at 3.04%. With the inclusion of OCBC China (higher treasury activities), Wing Hang’s 3Q17 NIM dropped 3bp qoq. Nonetheless, HK NIM improved due to narrowing of 1M and 3M-HIBOR.

Non-NII up 1% yoy, led by GEH and WM 

  • 3Q17 non-NII was 1% higher at S$978m, supported by wealth management (WM) and Great Eastern (GEH). WM fees increased 32% yoy and only dipped 5% qoq despite the absence of big fund launches. Private banking AUM grew 53% yoy/6% qoq to US$95bn.
  • Profit from life assurance rose 23% yoy, driven by strong operational (GEH’s TWNS up 16% yoy, though NBEV/NBEV margin fell 9%/10.8% pts yoy) and market performance. Even with the bulk of Barclays WIM costs in, cost-to-income ratio was stable at 42.4%.

Healthy credit quality 

  • New NPA formation eased qoq, with c.40% of new NPAs due to oil & gas. NPL ratio was unchanged at 1.3%, with coverage ratio at 101%. 
  • 3Q17 net allowances were lower 6% yoy/8% qoq at S$156m. Specific allowances were 40% yoy/31% qoq higher at S$138m (representing 24bp of loans) due to declining collateral values (oil & gas) and restructuring of credit for a Chinese state-owned enterprise (SOE) in the steel industry. 
  • Capital position was optimal, with CET 1 ratio at 13.1%.

Upgrade from Hold to Add with higher target price 

  • Factoring in higher loan growth, we increase our FY17F-19F EPS forecasts by 1.5-8.9%. Our GGM-based TP (11.2% ROE, 3% LTG, 9.4% COE), which is equivalent to 1.29x FY18F BV (vs. 5-year mean of 1.26x and 11.3% ROE), is raised (from S$11.98 to S$12.60) on the back of the estimates upgrades and roll-over to FY18F. 
  • With all engines purring, we upgrade OCBC to Add. 
  • Downside risk could be weaker-than-expected non-NII.

No new updates on impact of IFRS 9 and GEH Malaysia 

  • The Monetary Authority of Singapore (MAS) has clarified on IFRS 9 credit loss provisioning. Banks will comply with full IFRS 9 requirements. On top of this, MAS requires banks to maintain a 1% general provision, net of collaterals in equity, instead of a deduction to gross loans. This is termed as the RALR treatment (non-distributable regulatory loss allowance reserve). With IFRS 9 kicking in on 01 Jan 2018, we expect expected credit loss for stage 1 and stage 2 loans to be lower than the 1% general provisions.
  • In addition, there is some uncertainty with the classification of general provision reserves to RALR, as existing reserves are in excess of RALR requirement. However, as there is uncertainty over the tax implications should the excess general provisions be written back to P/L or retained earnings, the bank is unable to conclusively guide on the impact of IFRS 9 at this juncture.

There were also no further updates for GEH Malaysia. 

  • We understand that OCBC has to comply with Bank Negara Malaysia’s stricter enforcement for foreign-owned insurers to have a minimum local shareholding of 30% by Jun 2018. We see several options for GEH Malaysia:
    1. sell the stake to a strategic partner or to local institutional investors;
    2. list (IPO) the 30% stake.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-10-26
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 12.60 Up 11.980