OCBC Bank (OCBC SP) - Maybank Kim Eng 2018-02-15: On The Right Track

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - On The Right Track

Post-results, we remain positive that OCBC’s earnings momentum will sustain into FY18E. FY17 earnings met only 96% of our forecast due to higher expenses, lower net interest income, and lower income from associates. However, non-interest income beat our expectation due to a strong contribution from Great Eastern (GE SP, Not Rated; OCBC’s insurance arm) and higher wealth management (WM) fees.
We revise estimates with FY18/19E net profit up 7% each on a more positive outlook with higher revenue, lower provisions, partially offset by higher costs. With that, sustainable ROE is now 13.1% vs. 12% previously (unchanged are COE of 10.5% and growth rate 3.5%).
Our Target Price is raised 13% to SGD13.50 based on ~1.4x FY18E P/BV (from ~1.2x previously), slightly above its historical mean of 1.3x to reflect higher forecast ROEs.

Among Singapore banks, we prefer UOB (UOB SP, BUY, Target Price SGD29.33, see report: United Overseas Bank - Moving Steadily) due to pricing discipline and sensitivity to repricing intervals.

We expect total income to grow at a 3-year CAGR (2017-2020) of ~10% on the back of:
1. higher loan growth to ~9% y-o-y (from 7-9% previously) from a sanguine economic outlook and recovery in Singapore’s property market;
2. re-pricing intervals from higher rates; and
3. higher noninterest income mainly from higher WM fees and GE’s contribution as we expect non-II to grow at a 3-year CAGR of 8%.
We expect benign credit costs of 18-20bps barring significant asset quality deterioration. For every 10bps increase in credit costs, we estimate FY18-20E net profits could decline by 5%.

Fully-loaded CET1 capital is now at 13.1% (3Q: 12%), above the comfort level of 12.5%. As such, we see scope for dividends to be sustained. We raised our FY18-19E DPS by 8-14% on the back of stronger earnings growth, implying current yields of 3.2-3.3%.
The balance sheet remains healthy providing sufficient flexibility for management to pursue future growth opportunities.

We believe earnings momentum will sustain into FY18E. With 10% upside to our Target Price, we maintain HOLD, and await a lower entry point.
Upside risks are:
1. NIM improvement; and
2. higher income;
downside risks are:
1. lower income; and
2. higher provisions.
We factored into our forecasts a 35/20/25bps increase in 3M SIBOR, in line with our Singapore economist’s SIBOR forecasts of 1.55%/1.75% for FY18/19E. AUM growth at Bank of Singapore (OCBC’s private banking arm) has been robust at +25% y-o-y. Great Eastern’s underlying growth was robust as new business embedded value (NBEV) and total weighted new sales (TWNS) surged 17% y-o-y and 23% y-o-y in FY17. With asset-quality deterioration no longer a major concern for its O&G exposures, we expect credit costs to ease to 18-20bps for FY18-20E.
For every 10bps increase in credit costs, we estimate FY18-20E net profits could decline by ~5%.
Management guided FY18E cost-to-income ratio to be within 40-45%, loan growth to be a high single digit, and credit costs to be benign.

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, causing 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/ 2018-02-15

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 13.50 Up 12.000