OCBC Bank - Maybank Kim Eng 2018-05-08: Riding Through Mild Turbulence

OVERSEA-CHINESE BANKING CORP SGX: O39

OCBC Bank - Riding Through Mild Turbulence

OCBC Bank 1Q18 core PATMI of SGD1.1b (up 8% q-o-q, 29% y-o-y) slightly missed our expectation and met 21% of our previous FY18E forecast on lower non- interest income (non-II), offset by lower provisions and higher income from associates.
Excluding Great Eastern (GE SP, Not Rated), the bank’s operating profit was decent (+6% q-o-q, +10% y-o-y), which reflected good underlying performance and earnings momentum.
We revise FY18-20E net profit downwards by ~2%. With that, our assumed sustainable ROE is now 13.8% (14.0% previously), COE 10.5% and growth rate 3.5% (both unchanged).

Our Target Price is also reduced by 2% to SGD14.60 based on ~1.5x FY18E P/BV (unchanged), 1SD above its historical mean of 1.3x to reflect higher forecast ROEs. We believe its valuation multiple deserves to rise in view of its ability to expand ROEs from non-II growth.

Unlike DBS and UOB, which saw higher repricing effects working their way through in a higher rate environment, OCBCs NIM were flat q-o-q at 1.67% as cost of funds increased by 12bps q-o-q (DBS: 9bps/UOB: 8bps).
Customer spreads fell 6bps q-o-q/10bps y-o-y to 1.85%, and sticky CASA deposit now form 47% of total deposits in 1Q18 (4Q17: 49%, 1Q17: 50%). Management attributed the flat NIM from margin compression in Indonesia and lower-yielding margins from trade loans, as OCBC’s general commerce loans grew 4% q-o-q vs peers’ ~2%.
We factor in a higher SIBOR forecast for FY18/19E of 1.65%/1.90% (from 1.55%/1.75%) per our Singapore economist, offset by higher cost of funds. This raised net interest income slightly by 1-2% for FY18-20E. Management reiterated high single digit loan growth for FY18E and we maintain our loan growth assumption of 10% y-o-y.
We lower non-II by 6% on lower net trading income, net gains from investment securities and Great Eastern’s life profits. That said, we are still projecting 3-year CAGR of 12% for non-II.

1Q18’s total credit cost of 4bps is too low. We retain our credit costs of 18-20bps barring significant asset quality deterioration for FY18-20E. For every 10bps increase in credit costs, we estimate FY18-20E net profits could decline by 5%.

Decent yields of 3% should lend support to the share price.
Risks to our call are:
1. lower income;
2. higher costs; and
3. higher allowances.

Widening credit spreads from re-pricing of assets at higher interest rates.
Higher non-interest income from wealth management 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 | https://www.maybank-ke.com.sg/ 2018-05-08

SGX Stock Analyst Report BUY Maintain BUY 14.60 Down 14.830