Oversea-Chinese Banking Corp (OCBC Bank) - UOB Kay Hian 2018-05-08: 1Q18 Let Down By Flat Net Interest Margin

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OVERSEA-CHINESE BANKING CORP SGX: O39

Oversea-Chinese Banking Corp (OCBC Bank) - 1Q18 Let Down By Flat Net Interest Margin (NIM)

• The flat NIM in 1Q18 was primarily caused by NIM compression of 17bp q-o-q at OCBC NISP due to the Indonesian government's push for single-digit lending rate.
• Investors should not be unduly concerned with the significant drop in provisions as NPL formation has eased, there was aggressive clean-up in 4Q17 and the bank received S$30m repayment for oil & gas NPL.
• Maintain BUY and target price of S$16.50, based on 1.66x 2018F P/B.

RESULTS

• Oversea-Chinese Banking Corporation (OCBC) reported net profit of S$1,112m for 1Q18, up 29.2% y-o-y, and 4% above our forecast of S$1,067m.
• Broad-based sequential expansion in loans. Loans expanded 9.7% y-o-y and 3.9% q-o-q. The sequential expansion was driven by trade loans (general commerce: +4.1% q-o-q), including financing of commodities, building & construction (+8.6% q-o-q) and OCBC Wing Hang (+5% q-o-q).
• NIM under pressure. NIM was unchanged q-o-q at 1.67%. Management explained that the flat NIM was due to:
  1. trade loans, which command lower margins, accounted for a substantial portion of new loans in 1Q18; and
  2. Indonesian subsidiary OCBC NISP's NIM contracted 17bp q-o-q to 4.24% due to the government's push for single-digit lending rate.
  Net interest income grew 11.2% y-o-y.
• Wealth management maintained stellar rise. Fees & commissions increased 11.4% y-o-y, driven by an 18.6% y-o-y growth from wealth management. Contribution from fund management also grew 16% y-o-y. Bank of Singapore (BOS) collaborated with global fund houses to launch many new funds in 1Q18. AUM has also grown 19% y-o-y to US$102b.
• Accounting changes at GEH had negative impact on net trading income. Life insurance contributed S$166m, up 242% y-o-y. 1Q17 numbers were restated based on SFRS (I) 9 and accounting changes at Great Eastern Holdings (GEH). Its investments in bonds are held for collection of contractual cash flows and measured at amortised cost. However, equity investments for GEH’s shareholders’ funds caused a negative mark-to- market of S$40m-50m, classified under net trading income.
• Provisions dropped precipitously after aggressive clean-up in 4Q17. NPL balance declined 0.5% q-o-q while NPL ratio improved 6bp to 1.38%. New NPL dropped 24% y-o-y to S$297m. Provisions, determined by expected credit loss (ECL) methodology based on SFRS (I) 9, dropped 93% y-o-y to just S$12m, or credit cost of 2bp.
• Outlook brightens for loan growth. Management guides high-single-digit growth for loans (loan growth could hit low-teens if there is no outbreak of trade war) and fee income for 2018. It sees asset quality as benign and risk from the O&G sector contained. Management guides normalised credit cost at 15-20bp.
• Unlocking value through divestment of 30% stake in GELM. OCBC have regular discussions with the relevant authorities on IPO or trade sale for Great Eastern Life (Malaysia). Management has complied with the time schedule and milestones stipulated by Bank Negara Malaysia (BNM). OCBC has appointed a manager for IPO and advisor for trade sale to concurrently explore both routes to comply with the limits on foreign ownership.
• The sale of a 33.3% stake in Hong Kong Life Insurance is waiting for regulatory clearance. Management expects the divestment to be completed this year.
• Focus on reinvesting in core businesses. OCBC aims to provide steady and sustainable dividends. Management plans to maintain dividend payout at 40-50% of core earnings, which can support growth of 6-7% for risk-weighted assets and 10-12% for total assets. It sees sufficient opportunities for organic growth in key pillars of its businesses.
• Management intends to maintain CET-1 CAR at 12.5-13.5%. The bank will consider re- instating its scrip dividend scheme as a tool for capital management. Doing so would help OCBC support a higher dividend payout ratio.

EARNINGS REVISION/RISK

• We raise our net profit forecast for 2018 marginally by 0.7% as:
  1. we lower NIM to 1.67% (previously 1.70%), and
  2. lower credit cost to 16.6bp (previously 22.2bp).

VALUATION/RECOMMENDATION

• Maintain BUY. 
• Our target price of S$16.50 is based on 1.66x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.9%, COE: 7.75% (beta: 1.05x), growth: 3.0%).

SHARE PRICE CATALYST

• Continued investment in core commercial banking with proceeds from restructuring at Great Eastern Malaysia.
• Non-interest income from wealth management, fund management and life insurance will dem with growing affluence in Asia.

Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-08

SGX Stock Analyst Report BUY Maintain BUY 16.50 Up 16.020