OCBC - CIMB Research 2018-02-14: 4Q17 In-line Results, Non-NII To Continue To Shine

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC - 4Q17 In-line Results, Non-NII To Continue To Shine

OCBC Bank's FY17 net profit of S$4,146m (+19% y-o-y) was in line with consensus and our expectations at 103% of our FY17F. 4Q17 net profit of S$1,033m was at 26%.
Similar to peers, OCBC took advantage of the upcoming FRS 109 and cleaned up its O&G loan book. We expect O&G exposures to be contained with this move.
Fully-loaded CET1 CAR rose to 13.1%. A final DPS of 19 Scts was declared, bringing full-year DPS to 37 Scts (+3% y-o-y).

While management is comfortable with CAR of 12.5%, it sees growth opportunities to re-deploy internal generated funds.
Reiterate ADD with a higher Target Price. We expect OCBC’s non-NII franchise to continue to shine.

OCBC recorded a 4Q17 net profit of S$1,033m (+31% y-o-y), lifted by higher NII, strong non-NII showing and lower credit costs (due to release of excess GP).
Similar to peers, the bank took advantage of the upcoming FRS 109 to clean up its O&G loan book. Also, fully loaded CET1 CAR rose to 13.1% (3Q17: 12%).
A final DPS of 19 Scts was declared, bringing full-year DPS to 37 Scts (+3% y-o-y; 38% payout).
The group achieved a ROE of 10.9% for the quarter and 11.2% for FY17 (FY16: 10%).

4Q17 NII grew 14% y-o-y, driven by higher loans (+8% y-o-y/+2% q-o-q to S$237bn) and NIM (+1bp q-o-q/+4bp y-o-y to 1.67%). NIM averaged 1.65% for FY17 vs. 1.67% for FY16 (due mainly to lower loan yield offset by higher gapping income from money market).
We project NIM to average 1.7% for FY18F. Excluding S$2.1bn loans from NAB (National Australia Bank) consolidation, 4Q17 underlying loan growth would have ticked up 1% qoq.
Management re-affirmed a high single-digit loan growth guidance for FY18F; we input 7.4%.

Non-NII grew 23% y-o-y, led by higher fee and insurance income (+64%). Fee rose 19% yoy, led by higher WM (+38%). FY17 WM income expanded 43% y-o-y; BOS’ (Bank of Singapore) AUM rose 25% y-o-y to US$99bn.
Great Eastern Holdings’s 4Q17 TWNS was up 36% (FY17: +23%); NBEV up 35% (FY17:+17%); non-operating profit jumped almost 6x, given favourable market conditions.
Costs were well-managed, with 4Q17 CIR improving to 40.6% (4Q16: 45.1%). FY17 CIR was 41.9% vs. 44.6% for FY16 (despite consolidation of Barclays WM). We project 42% CIR for FY18F.

The group recognised S$1.06bn SP (178 bp of ave. loans) as it downgraded its OSV exposures (from S$5.7bn in 3Q17 to S$4.8bn in 4Q17). This was partially offset by S$0.9bn release of excess GP (total credit costs at 28bp of ave. loans).
New NPAs jumped to S$1.4bn; NPL ratio increased to 1.5% (3Q17: 1.3%); NPL coverage reduced to 77% (3Q17: 101%).
We forecast FY18F credit costs at 20bp, in line with SPs which were taken in prior to the current O&G downturn.

On the balance sheet, customer deposits increased 8% y-o-y/6% q-o-q with LDR at 82.5% (FY16: 82.9%). Management sees desired LDR in the high 80s, which would help NIM.
Fully loaded CET1 CAR improved to 13.1% from 12% in 3Q17 (half the improvement was attributed to BOS adopting an IRB (Internal Ratings-Based) approach; half from capital optimisation at Great Eastern Holdings as well as fine-tuning of market risk).
While management is comfortable with CAR at 12.5%, it sees growth opportunities to redeploy internal generated funds.

While markets could be sceptical of another year of strong non-NII showing (due to high-base effect), we believe that non-NII would continue to shine, thanks to secular trends underpinning WM, while Great Eastern Holdings would also offer a more holistic WM platform.
We raise our FY18-19F EPS by 3.3-6.1% on higher non-NII and lower credit costs. Reiterate ADD with a higher GGM-based Target Price of S$14 (implied 1.4x FY18F P/BV vs. FY19F ROE of 11.6%; 11.7x FY19F P/E – in line with mean).

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-02-14

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 14.00 Up 12.600