OCBC (OCBC SP) - DBS Research 2018-02-15: Solid Results But No Dividend Surprise

OCBC (OCBC SP) - DBS Vickers 2018-02-15: Solid Results But No Dividend Surprise OVERSEA-CHINESE BANKING CORP O39.SI

OCBC (OCBC SP) - Solid Results But No Dividend Surprise

  • Solid FY17 earnings on strong non-interest income, lower provisions; slight uplift in NIM but with strong loan growth.
  • Worst of NPL woes should be over; but caution is still on the sector for any improvements up.
  • Staying positive on prospects; slight tweak to earnings; credit costs remain a wildcard pending finalisation of SFAS109 implementation to be indicated by 1Q18.
  • Maintain BUY; Target Price at S$14.00.



What's New


A solid year end... 

  • OCBC's FY17 net profit was 19% higher to S$4,146m - in line with our expectations, but slightly above consensus. Earnings were driven by strong non-interest income from wealth management, investment gains and insurance, further supported by lower provisions despite additional specific provisions set aside for the remaining oil & gas exposure in 4Q17. 
  • Wealth management fee soared as Bank of Singapore’s (BoS) assets under management (AUM) grew by 25% y-o-y to US$99bn. Its insurance operations, under the Great Eastern Holdings (GEH) unit, performed well in line with improved market conditions. 
  • Separately, loan growth was strong at 8% y-o-y. NIM was lower on a full-year basis despite an improvement of 4bps in 4Q17.

…but lacked the dividend surprise. 

  • Final DPS was just 1 Sct higher at 19 Scts, bringing full-year DPS to 37 Scts (interim DPS at 18 Scts); the scrip dividend is not applicable. That said, capital remained strong with CET1 at 13.1% but stacks at the lowest vs peers currently. 
  • There was a sizeable release of CET1 during the quarter as BoS adopted the Internal Ratings Based (IRB) capital approach, a lower deduction from GEH and impact of risk-weighted asset (RWA) optimisation.

Specific provisions were higher as expected; finally using its GP buffer. 

  • As expected, OCBC added provisions in 4Q17 for the remaining part of its oil & gas portfolio but this was offset by a general provision (GP) reserve writeback of S$887m. 
  • On a net basis, overall provisions in 4Q17 were at S$178m, while FY17 provisions were at S$671m, both amounts lower compared to the previous corresponding periods. New NPLs rose to S$1.4bn in 4Q17, bringing full-year FY17 new NPLs to S$2.4bn (FY16: S$2.3bn). We believe this should mark the end of its oil & gas NPL issues.

Distressed oil & gas accounts contained. 

  • As at end FY17, OCBC’s oil & gas exposure stood at 6% of total loans or S$14.8bn, a slight increase from the previous quarter and from a year ago. Despite some repayments and write-offs, additional working capital lines were extended. 
  • Of the remaining vulnerable oil & gas exposures of S$4.8bn, 43% of these are not under stress, but the remaining 57% are deemed stressed; 70% of these are already classified as NPLs and are under restructuring. We understand collaterals have been written down to 30% of market value.

Regional operations did well. 

  • OCBC’s regional operations did well in FY17. OCBC Malaysia exhibited improved performance on higher NIM, stronger income, lower provisions and lower NPLs. 
  • OCBC NISP also improved with stable provisions and improved net interest income but lower NIM. Meanwhile, OCBC-WHB saw write-backs and gains from investment securities


Outlook


Oil & gas woes over; credit costs a wildcard with new accounting standards. 

  • With the chunk of additional provisions made largely on its oil & gas exposure in 4Q17, we believe, the worst for the sector should be over. Normalised credit costs should ease to pre-oil & gas woes era, which we believe should stay below 30bps. 
  • We are assuming credit cost of 26bps across FY18-20F for now but there could be upside risks to our forecasts should these be lower with the adoption of IFRS9/SFAS 109. 
  • Management indicated that credit cost should remain benign based on current operating environment. Further clarity would be available during the 1Q18 results announcement.

Loan growth and NIM momentum to continue in FY18. 

  • Loan growth is expected to track FY17’s momentum at high single digits, while NIM should continue its uptrend in FY18.
  • These have been built into our forecasts.

Room for higher dividend payout. 

  • Although its capital ratios stack the lowest among peers currently, assuming OCBC sticks to a minimum of its 40% payout on core earnings and is comfortable with a minimum CET1 ratio of 12.5%, we believe there could be room for some dividend upside from here. 
  • We have nevertheless assumed that dividend per share would stay at 38 Scts for now, with a corresponding 37% payout ratio based on our FY18F earnings.


Valuation & Recommendation


Maintain BUY, Target Price at S$14.00. 

  • Our Target Price of S$14.00 is based on the Gordon Growth Model (12% ROE, 4% growth, 9.5% cost of equity) which is equivalent to 1.4x FY18 BV, above its 10-year mean P/BV multiple. 
  • OCBC’s key differentiating factor lies in its insurance business which gives it a more holistic wealth management platform, which we believe is still under-appreciated by the market. Solid FY17 earnings was testimony to its non-interest income franchise. We made marginal tweaks to our FY18-19F earnings forecasts after incorporating actual FY17 numbers. 
  • Asset quality issues pertaining to the oil & gas segment have been dealt with, and sufficient provisions are said to have been made. A visible improvement in asset quality contrary to stabilisation could be an added re-rating catalyst apart from better NIM, loan growth and non-interest income prospects. 
  • A higher dividend payout could be an added boost to valuations.




Sue Lin LIM DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-02-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 14.000 Same 14.000



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