Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2017-10-06: 3Q17 Results Preview ~ Steady And Steadfast

Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2017-10-06: 3Q17 Results Preview: Steady And Steadfast OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corporation (OCBC SP) - 3Q17 Results Preview: Steady And Steadfast

  • We foresee healthy loan growth in 3Q17 driven by trade finance, residential mortgages and investment loans for overseas expansion. 
  • We expect NIM to have edged higher gradually but growth in fee income to have moderated to 12% yoy. 
  • We expect asset quality to stay resilient but provisions to have increased 6% qoq due to deterioration in valuations of collaterals. 
  • We forecast net profit at S$958m for 3Q17, up 1.6% yoy. 
  • Maintain BUY. Our target price for OCBC is S$13.38, based on 2018F P/B of 1.39x.



WHAT’S NEW


The Chinese are back. 

  • We expect Oversea-Chinese Banking Corporation (OCBC) to register moderate loan growth of 1.5% qoq in 3Q17 and it is on track to meet our loan growth forecast of 7.1% for 2017. Loan growth was driven by trade finance, residential mortgages and investment loans for overseas expansion. 
  • The exchange rate for the renminbi has stabilised, spurring the return in demand for US dollar-denominated trade finance facilities from Chinese companies.

NIM edges higher gradually. 

  • We expect NIM to have edged marginally higher by 1bp qoq to 1.66%. 
  • In Hong Kong, OCBC benefitted as the gap between 1M and 3M HIBOR had narrowed from 31bp to 20bp during the quarter. 
  • For Singapore, 3M SIBOR and 3M SOR moved higher by 13bp and 20bp respectively to 1.12% and 0.95%. However, the positive impact from Singapore was muted due to the time lag to re-price loans.

To have maintained double-digit growth in fee income. 

  • We expect fees from wealth management to have registered slower growth of 32% yoy to S$205m (growth of 66% yoy in 1H17 was boosted by upfront fees from distribution of funds managed by Blackrock and Invesco). We also expect healthy growth from trade and credit cards. 
  • Overall, we expect total fees and commissions to have increased by 12% yoy to S$479m.

Contributions from insurance to have normalised downwards qoq. 

  • We expect insurance operations to have contributed earnings of S$205m (life insurance: S$160m, general insurance: S$35m). We have imputed a net trading income of S$150m for 3Q17.
  • OCBC has recognised a gain of S$20.3m from the divestment of its 4.1% stake in United Engineers in 3Q17.

Higher provisions due to deterioration in valuations of collaterals.

  • We expect new NPLs to have moderated on a yoy basis. There was some increase in NPLs from the Oil & Gas sector but asset quality remains generally stable for other industry sectors. 
  • We expect total provisions to have increased 6% qoq to S$180m due to a quarterly review in valuations of collaterals, which resulted in some shortfall in provisions.


STOCK IMPACT


Steady and steadfast. 

  • We forecast OCBC’s net profit at S$958m for 3Q17, up 1.6% yoy but down 11.5% qoq (2Q17 earnings were boosted by mark-to-market gains from insurance operations).
  • We foresee the upcoming IPO for Great Eastern Malaysia and potential review of its dividend policy as key catalysts for share price performance. The stabilisation of asset quality would also remind investors that OCBC has a conservative management team and that the quality of its earnings is solid. 


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price of S$13.38 is based on 1.39x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 10.2%, COE: 7.75% (Beta: 1.05x) and Growth: 1.5%).
  • The stock provides an attractive dividend yield of 3.2%.


SHARE PRICE CATALYST

  • IPO for Great Eastern Malaysia to comply with limit on foreign ownership, which generates capital for re-investment in core commercial banking franchise.
  • OCBC could review its dividend policy, given that payout ratio is expected to fall below targeted range of 40-50% (2018F: 37.2%).
  • 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 | http://research.uobkayhian.com/ 2017-10-06
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.380 Same 13.380



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