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

OCBC Bank (OCBC SP) - Maybank Kim Eng 2018-03-20: Sustainable Momentum OVERSEA-CHINESE BANKING CORP O39.SI

OCBC Bank (OCBC SP) - Sustainable Momentum


Raised EPS and Target Price; Upgrade to BUY 

  • 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.



Benefit from higher loan growth 

  • 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%.


Non-II driven by WM and insurance 

  • 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.


Risks to our call 

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


Swing Factors 


Upside 

  • 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. 

Downside 

  • 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



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