OCBC Bank (OCBC SP) - UOB Kay Hian 2018-01-17: 4Q17 Results Preview ~ Cleaning Up Legacy NPLs With Transition To FRS 109

OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corporation (OCBC SP) - 4Q17 Results Preview ~ Cleaning Up Legacy NPLs With Transition To FRS 109

We expect OCBC to report a solid set of results with NIM expansion of 4bp yoy and 16.7% yoy growth in fees. Management will utilise the opportunity afforded by the transition to FRS 109 to clean up its legacy NPLs.
We expect OCBC to recognise additional NPLs of S$784m and write-back surplus general provisions of S$392m. NPL ratio is expected to increase by 36bp qoq to 1.62% but credit cost is contained at 35.3bp.
Maintain BUY. Our target price is S$14.88 based on 1.58x 2018F P/B.

We expect Oversea-Chinese Banking Corporation (OCBC) to register positive loan growth of 1.5% qoq in 4Q17, driven by trade loans, residential mortgages and conglomerate expanding overseas through real estate development and hospitality projects.
OCBC has completed the acquisition and consolidated National Australia Bank’s (NAB) private wealth businesses in Singapore and Hong Kong, which added mortgages of US$1.7b for overseas properties.
OCBC is on track to meet projected loan growth of 7.4% for 2017.

NIM edged higher by 1bp qoq to 1.67% in 4Q17, driven mainly by NIM expansion in Singapore due to higher SIBOR and SOR.
On a full-year basis, NIM is expected to recede by 2bp to 1.65% due to lacklustre NIM in 1H17.

Fees from wealth management maintained positive growth momentum in 4Q17 as high net worth clients continued to adopt a risk-on approach in their investments. Trade and loans related fees also contributed to healthy growth.
Overall, we expect fees to increase by double-digit rate of 16.7% yoy.

Operationally, we expect Great Eastern to maintain healthy growth in weighted new sales and stable NBEV margin. We also expect small mark-to-market losses from its bond portfolio in Malaysia to be offset by gains from equities in Singapore and Malaysia. Insurance business, encompassing life and property & casualty, is expected to contribute earnings of S$205m.
We have factored in net trading income of S$130m for 4Q17.

Management is expected to take the opportunity during its transition to FRS 109 to clean up its books. We have estimated surplus general provisions for OCBC at S$490m. We expect management to recognise legacy NPLs of S$784m for exposure to the oil & gas and other sectors.
We expect OCBC to write-back S$392m of surplus general provisions. We expect management to transfer S$81m of surplus general provisions to retained earnings and regulatory loss absorption reserve (RLAR) after factoring tax of 17%, which boost BVPS by S$0.02 or 0.2%.

Bank of Singapore (BOS) has implemented internal ratings-based methodology for computing its risk-weighted assets. The new methodology should improve its CET-1 CAR on a sequential basis in 4Q17.

We forecast OCBC’s net profit at S$923m for 4Q17, up 17% yoy (4Q16 was a low base due to higher specific provisions) but down 13% qoq (3Q17 earnings were boosted by robust contribution from insurance and moderation in credit costs).
We see the upcoming IPO of Great Eastern Malaysia as a key catalyst for share price performance. Management is in regular discussions with regulators. OCBC has to meet the limit on foreign ownership of 70% by Jun 18.

Maintain BUY.
Our target price of S$14.88 is based on 1.58x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 10.4%, COE: 7.75% (Beta: 1.05x) and Growth: 3.0%).

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 its targeted range of 40-50% (2018F: 36.7%).
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/ 2018-01-17

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.880 Same 14.880