Oversea-Chinese Banking Corp (OCBC SP) - UOB Kay Hian 2018-02-15: 4Q17 Strong Growth In Non-Interest Income

Oversea-Chinese Banking Corp (OCBC SP) - UOB Kay Hian 2018-02-15: 4Q17 Strong Growth In Non-Interest Income OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corp (OCBC SP) - 4Q17 Strong Growth In Non-Interest Income

  • OCBC's 4Q17 results were in line with expectations. Fees from wealth management grew 37.6% y-o-y while contribution from life insurance grew 80% y-o-y. 
  • The outlook brightens with guidance of high single-digit growth in loans and fees for 2018. OCBC has increased final dividend by 5.6% to 19 S cents. 
  • An IPO or trade sale for a 30% stake in Great Eastern Life Malaysia would be carried out in 2H18. 
  • Maintain BUY and target price of S$14.90, based on 1.56x 2018F P/B.



RESULTS

  • Oversea-Chinese Banking Corporation (OCBC) reported net profit of S$1,033m for 4Q17, above our forecast of S$923m but in line with consensus estimate of S$1,080m.

NIM on gradual uptrend. 

  • Loans grew 2.1% q-o-q and 7.8% y-o-y. The sequential expansion was driven by loans in Singapore and Greater China, which grew 1.8% and 3.1% q-o-q respectively. 
  • General commerce and residential mortgages grew 5% and 4% q-o-q respectively. 
  • NIM expanded 1bp q-o-q to 1.67% and net interest income grew 14% y-o-y.

Non-interest income grew 30.1% y-o-y. 

  • Fees from wealth management grew 37.6% y-o-y. Bank of Singapore’s AUM expanded 25.3% y-o-y to US$99b. Fees from fund management and credit cards also grew 3.7% and 5% y-o-y respectively. 
  • Life insurance made a sizeable contribution of S$259m, up 80% y-o-y. Total weighted new sales and new business embedded value grew 35% y-o-y. 
  • Both mark-to-market gains and investment profits from shareholders’ funds grew strongly.

Net trading income was soft at S$99m. 

  • Performance during the quarter was boosted by gains from investment securities of S$249m.

Cleaning up legacy NPL. 

  • As part of the transition to FRS 109, OCBC recognised new NPL of S$1,355m and NPL ratio went up from 1.26% to 1.44%. Total provisions were S$178m after writing back S$887m in general provisions.

Fully loaded CET-1 CAR improved 1.1ppt to 13.1%

  • Fully loaded CET-1 CAR improved 1.1ppt to 13.1% due to the implementation of internal ratings-based approach (IRBA) for Bank of Singapore and reduced deduction to capital for Great Eastern. 
  • OCBC plans to implement IRBA for OCBC Wing Hang in 2018.

OCBC declared a final dividend of 19 S cents, up 5.6% y-o-y.



STOCK IMPACT


Outlook brightens for loan growth. 

  • Management guided high-single-digit growth for loans and fee income for 2018. 
  • It sees asset quality as benign and risk from the O&G sector contained.

Looking at O&G through the rear view mirror. 

  • Management sees the risk from the oil & gas (O&G) sector being contained and adequate provisions have been made. OCBC has on-balance sheet exposure of S$4.8b to offshore support vessels, of which S$2.1b, or 43%, were made to large conglomerates and national oil companies. 71% of the balance, or S$1.9b, is classified as NPL. 
  • 75% of the NPL are servicing principal and/or interest while 84% are secured with collaterals.

Focus on reinvesting in core businesses. 

  • OCBC aims to provide steady and sustainable dividends. Management plans to maintain dividend payout ratio at 40-50% of core earnings, which can support growth of 6-7% for risk-weighted assets and 10-12% for total assets. It sees sufficient opportunities for organic growth in key pillars of its businesses.

Reducing stake in GELM. 

  • Great Eastern has to reduce its stake in Great Eastern Life Malaysia (GELM) from 100% to 70% to comply with limits on foreign ownership of insurers. Management will evaluate the divestment of 30% of GELM through an IPO or trade sale. 
  • Great Eastern has to submit its plan to Bank Negara by Jun 18 and execute the plan likely in 2H18.


EARNINGS REVISION/RISK

  • We raise our net profit forecast for 2018 marginally by 1.1%.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price of S$14.90 is based on 1.56x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.4%, COE: 7.75% (beta: 1.05x), growth: 3.0%).
  • The stock provides a decent dividend yield of 3.1%.


SHARE PRICE CATALYST

  • NIM expansion in 2018 and 2019.
  • Continued investment in core commercial banking with proceeds from restructuring at Great Eastern Malaysia.
  • 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/ 2018-02-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.90 Up 14.880



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