OCBC Bank (OCBC SP) - Maybank Kim Eng 2018-03-20: Sustainable Momentum

OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - Sustainable Momentum

We believe OCBC’s earnings momentum is likely to be sustained in an upcycle. We raised our FY18-20E net profit by 4-12% due to higher assumptions for loan growth and non-interest income (non-II) from stronger wealth management (WM) earnings and life insurance contribution from Great Eastern (GEH) (GE SP Equity, Not Rated).
With the revisions to our EPS forecasts, our assumed sustainable ROE is now 14.0% (13.1% previously), COE 10.5% and growth rate 3.5% (both unchanged). Our Target Price is raised 10% to SGD14.83, based on 1.5x FY18E P/BV (from ~1.4x), 1SD above its historical mean of 1.3x to reflect higher forecast ROEs.

We also believe OCBC’s valuation multiple deserves to rise in view of its ability to expand ROEs from non-II growth. U/G to BUY.

We estimate OCBC’s multiplier between its loan growth and Singapore’s GDP growth is 2.9x on average, higher than 2.4-2.6x for peers.
OCBC’s multiplier was higher in recent quarters, which could possibly be due to lending to more Singapore-based corporates for trade and investment flows. As a result, we raised our FY18-20E loan growth assumption to ~10% from ~9%.

Wealth Management (WM) will remain a key growth driver for OCBC, as WM income formed 34% of total FY17 income. We raised our FY18-20 forecasts for non-II by 6-14% on higher WM fees and GEH’s insurance contribution.
We believe WM growth can be sustained due to:
1. cross-selling efforts across its wealth platform;
2. tapping onshore private banking in Indonesia; and
3. increasing AUM for the Bank of Singapore.
It will also see higher contribution from Great Eastern Holdings (GEH) as its underlying operations have been robust, as new business embedded value and total weighted new sales rose 17% y-o-y and 23% y-o-y in FY17. Moreover, GEH’s presence in Singapore and Malaysia allows it to tap the under-penetrated life insurance sector.
We forecast a 3-year CAGR of ~22% for GEH’s life profits for OCBC, as we believe our previous estimates were conservative.

Downside risks to our BUY thesis are:
1. lower WM fees;
2. lower insurance contribution from GEH; and
3. higher provisions.

Widening credit spreads from re-pricing of assets at higher interest rates.
Higher non-interest income from WM 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/ 2018-03-20

Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 14.83 Up 13.500