Oversea-Chinese Banking Corporation - UOB Kay Hian 2018-04-20: 1Q18 Results Preview ~ Credit Costs Normalise Downwards To Pre-Oil & Gas Levels

Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2018-04-20: 1Q18 Results Preview Credit Costs Normalise Downwards To Pre-Oil & Gas Levels OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corporation (OCBC SP) - 1Q18 Results Preview Credit Costs Normalise Downwards To Pre-Oil & Gas Levels

  • We expect OCBC to report robust loan growth of 7.9% y-o-y and 2.2% q-o-q in 1Q18 due to positive business sentiment and strong demand from the corporate sector. NIM continues to expand as SIBOR and SOR march higher steadily. We expect fee income to grow 4.6% y-o-y despite a high base in 1Q17, driven by wealth management.
  • Credit costs should normalise downwards to levels prior to the crisis from the oil & gas sector. 
  • Maintain BUY and target price of S$16.02, based on 1.64x 2018F P/B.



WHAT’S NEW


Benefitting from positive business sentiment. 

  • We expect Oversea-Chinese Banking Corporation (OCBC) to register loan growth of 7.9% y-o-y and 2.2% q-o-q for 1Q18, on track to deliver on its guidance of high-single-digit loan growth for 2018. 
  • The bank sees opportunities to support conglomerates that are expanding overseas in real estate development and hospitality projects. Locally, there is growth from the residential property sector on en bloc transactions and new property launches. There is healthy growth from trade loans and residential mortgages.

NIM edges higher gradually. 

  • We expect NIM to expand 6bp y-o-y and 1bp q-o-q in 1Q18. The upward trend in NIM is supported by rising SIBOR and SOR, which are moving higher in tandem with successive hikes in the Fed funds rate. 
  • Management intends to gradually raise its loan-to-deposit ratio (LDR) at 83.5% as of Dec 17, which will support a firmer NIM.

Maintains double-digit growth in fee income. 

  • We expect fees to increase 4.6% y-o-y (due to a high base in 1Q17), driven by wealth management with AUM crossing above the US$100b mark. 
  • We also expect healthy growth from loans and trade related fees.

Change in accounting policy affects contributions from insurance. 

  • Great Eastern Holdings has adopted FRS 109 on Financial Instruments from 1 Jan 18. Its investments in bonds are held for collection of contractual cash flows based on the principal amount outstanding and are measured at amortised cost. Thus, mark-to-market gains or losses on its profit & loss would be significantly reduced. 
  • Operationally, we expect Great Eastern to maintain healthy growth in weighted new sales and stable NBEV margin. The insurance business, encompassing life and property & casualty, is expected to contribute recurrent earnings of S$185m.
  • We have factored in net trading income of S$120m for 1Q18.

Asset quality stabilised after weathering headwinds from oil & gas (O&G). 

  • We expect NPL formation to be benign and NPL ratio to be stable at 1.43%. Credit costs are expected to have moderated to 22.3bp in 1Q18, from 30.3bp last year.



STOCK IMPACT


Surging forward with headwinds from O&G already behind us. 

  • We forecast OCBC’s net profit at S$1,067m for 1Q18, up 9.7% y-o-y and 3.3% q-o-q. 
  • Credit costs should normalise downwards to levels prior to the crisis from the O&G sector.

Unlocking value through IPO/trade sale for GELM. 

  • Bank Negara Malaysia (BNM) has warned foreign insurers that the limit on foreign ownership of 70% is not a new or recent directive. It is based on specific commitment given by foreign insurers when they applied for entry into the Malaysian insurance market. Thus, BNM is expected to strictly enforce the limit on foreign ownership by the deadline of Jun 18. 
  • Great Eastern Holdings is assessing possible options for its minority stake in Great Eastern Life Assurance (Malaysia) (GELM). It is reported to be in talks with the Employee Provident Fund (EPF) on a stake sale.

BOS doing a roaring business in Greater China. 

  • Bank of Singapore (BOS) plans to double its headcount in Hong Kong to service the growing number of millionaires and billionaires in China. The private bank has taken up another floor at the landmark One International Financial Centre and the increased staffing is expected to be in place by end-20. The number of relationship managers expanded 10% and AUM grew 25% for Greater China in 2017. 
  • BOS plans to open one family office in every major city in China by end-18 to advice entrepreneurs on the transfer of wealth to the next generation.


EARNINGS REVISION/RISK

  • We raise our net profit forecast for 2018 by 4.3% as we factor in lower credit costs of 22.2bp (previously 27.5bp), from 29.3bp last year.


VALUATION/RECOMMENDATION

  • Maintain BUY. 
  • Our target price of S$16.02 is based on 1.64x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.8%, COE: 7.75%, beta: 1.05x, growth: 3.0%).


SHARE PRICE CATALYST

  • An IPO or trade sale of its 30% stake in GELM, which generates capital for re-investment in OCBC’s core commercial banking franchise.
  • Non-interest income from wealth management, fund management and life insurance expanding in tandem with growing affluence in Asia.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-20
SGX Stock Analyst Report BUY Maintain BUY 16.02 Up 14.950



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