OCBC - CGS-CIMB 2018-05-07: 1Q18 “Good” Bank, “Bad” Insurance

OCBC - CGS-CIMB 2018-05-07: 1Q18 “good” Bank, “bad” Insurance OVERSEA-CHINESE BANKING CORP SGX: O39

OCBC - 1Q18 “good” Bank, “bad” Insurance

  • OCBC Bank's 1Q18 net profit of S$1,112m (+29% y-o-y) was slightly below consensus and our expectations, at 24% of our full-year forecast.
  • The key positive for the quarter was very low credit costs of S$12m or 4bp of loans. Management guided for 20-25bp for FY18F; we input 18bp.
  • The key negative was flat q-o-q NIM, due to high proportion of trade loans and Indonesia. This dimmed the positivity from loans, which grew 4bp q-o-q.
  • The q-o-q weakness in Great Eastern Holdings (GEH) and today’s drop in OCBC share price also reflected the need to deliver quarterly earnings. That said, insurance earnings are backward-looking.
  • Downgrade to HOLD. Our order of preference remains DBS, UOB and OCBC.

Results highlights

  • The key positive for the quarter was very low credit costs of S$12m vs. S$160m-170m/qtr booked in FY17. Excluding Great Eastern Holdings (GEH), banking momentum remained robust with earnings up 25% y-o-y/48% q-o-q. 
  • The group achieved y-o-y improvement across its franchise (GEH, Wing Hang, Malaysia and NSIP) as well as 11.8% ROE for 1Q18. The key negative was flat q-o-q NIM. 
  • From a sequential perspective, GEH “disappointed” with a non-operating loss from widening credit spreads as well as lower profit from shareholders’ fund.

NIM flat q-o-q due to higher trade loans and Indonesia

  • NII in 1Q18 was up 11% y-o-y but down 1% q-o-q. NIM increased 5bp y-o-y but was flat q-o-q at 1.67%. We note that deposit costs moved up 12bp q-o-q vs. loan yields’ 6bp. 
  • Additionally, the high proportion of trade loans and Indonesia (NIM dropped 17bp q-o-q) were the reasons behind the flat q-o-q NIM. The positive was loan growth expansion of 10% y-o-y/4% q-o-q, ahead of peers on a sequential basis. 
  • Loan growth was driven by trade, construction and creation of leverage products by Bank Of Singapore.

Non-interest income (non-II) affected by q-o-q weakness in GEH

  • Non-II increased 8% y-o-y on fees (+11% y-o-y, thanks to wealth management [+19% y-o-y]) and higher insurance income (+242% y-o-y). However, non-II fell 24% q-o-q due to lower insurance (-38% q-o-q) and investment income. 
  • On Great Eastern Holdings (GEH), we note that total weighted new sales (TWNS) decreased 17% y-o-y due to a shift from single premium to regular premium products. New Business Embedded Value (NBEV), accordingly, declined 9% y-o-y but NBEV margin was higher at 43.6% (change in product mix). The sequential weakness came from non-operating loss and lower profit from shareholders’ fund.

PPOP slightly below on lower income, offset by lower credit costs

  • Given the q-o-q drop, non-II made up 39.3% of total income (4Q17: 46%). 
  • Operating expenses increased 6% y-o-y vs. 10% growth in total income, resulting in positive jaw. CIR came in at 44.2% (1Q17: 45.9%). 
  • Asset quality was healthy with NPA formation normalising to S$297m. NPA allowance coverage improved to 78% (4Q17: 77%) while NPL ratio dipped to 1.4% (4Q17: 1.5%). 
  • Total credit costs were very low at S$12m, with credit costs forming 4bp of loans. Management guided for 20-25bp for FY18F.

Capital position

  • Deposits grew 9% y-o-y/2% q-o-q. LDR increased to 84.4% (4Q17: 82.5%). LCR held at 149% (the other two banks displayed a downwards trend). 
  • Fully phased-in CET1 ratio remained at 13.1% (we understand Wing Hang could be included by late-2019 or early 2020; management’s comfortable level is 12.5-13.5%).

Downgrade to Hold with lower GGM-TP

  • Today’s 3.5% fall in OCBC’s share price reflects the need to deliver quarterly earnings (considering high multiples). That said, we highlight that insurance earnings are backward-looking, and the change in Great Eastern Holdings’ accounting helps to reflect underlying earnings better. 
  • We lower our GGM-Target Price (from S$15.00 to S$14.00) as we now pencil in sustainable ROE of 11.8% (prev. 12%), which implies 1.5x FY18F P/BV. 
  • Considering capital position and ROE, we find OCBC to be fairly valued. Downgrade to HOLD. 
  • Upside risks: higher non-II and NIM.

YEO Zhi Bin CGS-CIMB | https://research.itradecimb.com/ 2018-05-07
SGX Stock Analyst Report HOLD Downgrade ADD 14.00 DOwn 15.000