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 Corporation (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.



WHAT’S NEW


Pick-up in loan growth in 2H17. 

  • 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 on an upward trend. 

  • 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.

Maintains double-digit growth in fee income. 

  • 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.

Steady contributions from insurance businesses. 

  • 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.

Transition to FRS 109. 

  • 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%.

Higher CET-1 CAR. 

  • 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.


STOCK IMPACT


Maintaining forward momentum. 

  • 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.


EARNINGS REVISION/RISK

  • We tweaked our earnings model to incorporate the transition to FRS 109.


VALUATION/RECOMMENDATION

  • 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%).


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 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



Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......