OCBC Bank (OCBC SP) - Maybank Kim Eng 2017-10-27: On Track For Growth

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - On Track For Growth

OCBC's 3Q17 core PATMI of SGD1.06b (-2% QoQ, +12% YoY) beat ours and Bloomberg consensus estimates by 10%/5%. 9M17 core PATMI of SGD3.1b (+16% YoY) met 77% of our previous FY17 forecast.
With positive growth momentum, we raised FY17-19E core net profit by 5-7%. With the change in EPS forecasts, our assumed sustainable ROE is now 12% (11.4% previously), COE 10.5%, and growth rate 3.5% (both unchanged).
Accordingly, our TP is raised 9% to SGD12.00, based on ~1.2x FY18E P/BV (from ~1.1x), slightly below its 10-year mean of 1.3x to reflect lower forecast ROEs compared to previous periods.

With NIM in 9M17 at 1.64% vs 1.67% in FY16, management cited that making up for the difference of 3bps in 4Q17 will not be easy. Given the margin compression from competition and the chase for high-quality credit business, this will likely offset some of the benefits from repricing effects of higher SGD rates.
We lowered our FY17 NIM slightly to 1.67% (vs 1.68% previously), but maintain our forecast of slightly higher NIMs of 1.69-1.70% across FY18-19E on the back of higher rates.

On the loan loss provisioning for IFRS 9, MAS will require D-SIBs to adopt the RLAR Approach (i.e. establish non-distributable regulatory loss allowance reserves [RLAR] via appropriation of retained earnings) to comply with minimum regulatory loss allowance for non-credit impaired exposures, which is 1% of exposures net of collaterals.
While a “Day One” adjustment into RLAR will result in a one-off increase in shareholders’ equity, management is unable to provide more colour as it’s seeking clarity from regulators (for e.g. whether shifting GP to retained earnings will be taxable).
Our current forecasts have not factored in IFRS 9.

With less than 10% upside to our TP, maintain HOLD.
Risks to our call include:
1. NIM improvement from higher rates;
2. higher non-interest income; and
3. higher provisions.

We raised FY17-19E core net profit by 5-7% mainly on:
1. higher loan growth of 7- 9% (from 6-8%);
2. higher non-interest income (non-II) by 2% mainly from higher wealth management (WM) fees and GE contributions in a risk-on environment; and
3. lower provisions by 14-20% as our previous estimate is too conservative.
Our FY17-19E credit costs are now 22-31bps (from 28-36bps). We shifted the one-off gains of SGD358m from sale of Hong Kong Life from FY17E to FY18E as the transaction is likely to be completed next year.

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.

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/ 2017-10-27

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 12.00 Up 11.050