OVERSEA-CHINESE BANKING CORP
SGX:O39
Oversea-Chinese Banking Corporation (OCBC SP) - 2Q18 Results Preview: Laggard In Net Interest Margin Expansion
- We expect OCBC to register a healthy loan growth of 10% y-o-y and wealth management fees to grow 20.9% y-o-y with steady expansion of AUM in 2Q18. However, investors could be disappointed with an expected second consecutive quarter of flattish NIM (we anticipate NIM expansion to resume in 2H18) and a moderation in contribution from insurance due to a correction in the bond market.
- Management seeks to improve dividend payout ratio by re-instating its scheme dividend scheme.
- Maintain BUY. Target price: S$13.52.
WHAT’S NEW
Maintain steady loan growth.
- We expect Oversea-Chinese Banking Corporation (OCBC) to register loan growth of 10% y-o-y and 2% q-o-q for 2Q18, on track to deliver management’s guidance of high-single-digit loan growth for 2018.
- OCBC saw healthy growth in its flow business for trade finance and cross-border investments. In Singapore, the bank supported conglomerates expanding into overseas markets. Regionally, OCBC experienced healthy growth in its operations in Indonesia and China but remains cautious for Malaysia’s.
NIM stayed flat.
- We expect NIM to stay flat y-o-y at 1.65% in 2Q18. SIBOR and SOR have risen 7bp and 12bp to 1.52% and 1.59% respectively in 2Q18, in tandem with successive hikes in the Fed funds rate. However, the bank was affected by higher cost of fixed deposits in Singapore and stringent enforcement of single-digit lending rate in Indonesia. Growth in net interest income has slowed to 7.2% y-o-y in 2Q18.
Continued expansion in AUM.
- We expect wealth management fees to increase 20.9% y-o-y in 2Q18 due to continued expansion of AUM. We also expect healthy growth from loans and trade related fees. Overall, we expect fees to increase 13.8% y-o-y.
Bond market correction affects contribution from insurance.
- Yields for 10-year government bonds in Singapore and Malaysia increased by 24bp and 26bp to 2.53% and 4.20% respectively in 2Q18. Thus, we expect Great Eastern to incur mark-to-market losses for its non-participating funds. Its insurance business, encompassing life and general insurance, is expected to contribute earnings of S$145m, down 29.6% q-o-q.
- We have factored in net trading income of S$120m for 2Q18, a slight recovery from the dismal S$94m in 1Q18.
Maintaining existing lean cost structure.
- We expect cost-to-income ratio to be relatively unchanged at 43.5%, within the usual range of 40-45%. Staff cost is expected to increase 4.4% y-o-y along with the annual salary increment in 2Q18.
Benign asset quality after weathering headwinds from oil & gas.
- We expect NPL formation to be benign and NPL ratio to be stable at 1.37%.
- Credit cost is expected to stay muted at 12bp (2Q17: 30bp) due to the huge clean-up of NPLs and hefty provisions undertaken in 4Q17 before implementing SFRS (I) 9. However, credit cost is expected to normalise upward towards management’s guidance of 15-20bp in 2H18 as uncertainties created by trade conflicts could moderate GDP growth.
STOCK IMPACT
Resilient but flattish.
- We forecast OCBC’s net profit at S$1,097m for 2Q18, flattish y-o-y (2Q17 earnings were boosted by strong contribution from insurance) and q-o-q.
Addressing investors’ disappointment over lacklustre dividend yield.
- OCBC would catch up with peers in CET-1 CAR through the divestment of a 33.33% stake in Hong Kong Life Insurance to increase CET-1 CAR by 0.3ppt (expected completion in 4Q18) while the implementation of Internal Ratings-based Approach (IRBA) at OCBC Wing Hang would increase CET-1 CAR by 0.6ppt (expected completion in 2019).
- Management plans to reinstate its scrip dividend scheme to support a higher dividend payout.
EARNINGS REVISION/RISK
- We cut our net profit forecast for 2018 by 13.5% to S$4,363m as it is uncertain whether the planned IPO for Great Eastern Life Assurance (Malaysia) would proceed. The Malaysian government is expected to conduct a review of the directive for foreign insurers to reduce their stakes in local insurance subsidiaries in Malaysia to 70% or below.
VALUATION/RECOMMENDATION
- Maintain BUY.
- Our target price of S$13.52 is based on 1.41x 2018F P/B, derived from the Gordon Growth Model (ROE: 11.0%, COE: 8.25%, beta: 1.1x), growth: 1.5%).
SHARE PRICE CATALYST
- Divestment of its 33.33% stake in Hong Kong Life Insurance for HK$2,366.7m (S$410.2m) cash, which generates capital for re-investment in OCBC’s core commercial banking franchise.
- Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.
Andrew CHOW CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2018-07-19
SGX Stock
Analyst Report
13.52
Down
14.280
