OCBC - CGS-CIMB Research 2018-08-06: Slow And Steady Could Win The Race

OCBC - CGS-CIMB Research 2018-08-06: Slow And Steady Could Win The Race OVERSEA-CHINESE BANKING CORP SGX:O39

OCBC - Slow And Steady Could Win The Race

  • Lower loan loss provision (only S$21m) was the key reason for OCBC’s 2Q18 earnings outperformance. Net profit of S$1.21bn is 4% above our expectations.
  • Anticipated trends of weaker wealth management showed up but not alarming (-12% q-o-q, +5% y-o-y). Positive q-o-q net new money but offset by MTM of customer portfolio.
  • Loan growth was softer than that of peers at +2.3% q-o-q. NIM was flat q-o-q at 1.67% but expect to expand gradually in 3Q18 from repricing of mortgage loans.
  • Our GGM Target Price is unchanged at S$14.00 (LTG: 3%, ROE:11.8%), implies 1.4x CY18 P/BV vs. ROE of 11.4%. Given the upside of 23% in Target Price, we upgrade to ADD.
  • Key catalysts could be OCBC’s ability to maintain the q-o-q earnings improvement. Our preferences among Singapore banks are UOB, OCBC and DBS, in that order.

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2Q18 beat supported by lower credit costs

  • OCBC reported a 2Q18 net profit of S$1.21bn (+9% q-o-q, +16% y-o-y), ahead of expectations mainly on lower credit costs. 1H18 net profit was 51% of our FY18F. Loan loss provision was only S$21m (1Q18: S$12m, S$168m/quarter in FY17), with credit costs at 3bps.
  • PPOP was in line at S$1.44bn (+11% q-o-q, 6% y-o-y). Positive jaw seen in 2Q18.
  • OCBC’s 2Q18 DPS of S$0.20 was higher vs. 1H17’s S$0.18 and a scrip dividend scheme is applicable, priced at a 10% discount to the volume weighted average price of the stock from 15-17 Aug.
  • ROE of 12.6% was higher than that of peers (DBS:11.8%, UOB: 12.1%) but CET 1 ratio of 13.2% was the weakest (DBS: 13.6%, UOB: 14.5%).

NIM lacklustre but expect better 2H18 from repricing of mortgage loans

  • OCBC’s 2Q18 loan growth was softer vs. peers at +2.3% q-o-q, +10.7% y-o-y (DBS: 3.8%, UOB 3%), LDR: 85.9% (1Q18: 84.4%).
  • Like peers, Greater China loan book grew the most in quantum (S$2.38bn, 3.8% q-o-q), followed by Indonesia (S$1bn, 5.4% q-o-q). Flat NIM of 1.87% was partly due to more US$ deposits funding HK growth. Cost of funding was up 17bps q-o-q, offset by a similar growth in asset yield.
  • Although margins thinned ( < 1.67%), OCBC has continued to focus on low-risk trade loans which contributed 30% of the q-o-q loan growth. NIM outlook is still expected to trend up from 3Q18 with more repricing of mortgage loans (26% of loan).
  • We expect a 7.2% loan growth (YTD: 6.3%) in line with its high-single-digit guidance.

Trading income and life assurance helped to cushion fee income dip

  • OCBC’s 2Q18 wealth management fee dipped S$30m q-o-q to S$225m due to mark-to-market (MTM) of portfolio.
  • Insurance operations was up 14% q-o-q to S$234m. Great Eastern’s (GE) 2Q18 net profit was S$197m (+61% q-o-q, +3% y-o-y). Total weighted new sales up 28% q-o-q to S$327m. New business embedded value up 38% q-o-q to S$140m (margin dipped 9bps to 42.7%).
  • Net trading income gave a boost to the overall non-interest income mainly due to MTM of the valuation of the equity portfolio of GE’s shareholders’ funds.

Lowest credit cost among peers, guidance too conservative

  • OCBC’s asset quality was stable with NPL unchanged q-o-q at 1.38%. Loan loss provision was only S$21m (2Q18: 3bps, 1Q18: 2bps) with some recovery in O&G large vessel. We think the guidance of 15-20bps credit cost is too conservative and pen in 8bps for FY18.
  • NPA formation remained stable q-o-q at SS$277m.
  • CIR was down to 41.9% with staff costs dipping 4% q-o-q. Sweet spot for CIR is guided at 43% (1H18: 43%).

Upgrade to ADD from Hold, unchanged Target Price of S$14.00 given the 23% upside

  • OCBC’s CET 1 ratio was stable at 13.2% (within guidance of 12.5-13.5%). As CET 1 ratio is at the higher end of guidance, there may be limited scope for a dividend surprise. However, we lift our DPS to S$0.41 (from S$0.38) to reflect 1H18’s higher EPS.
  • Our EPS is up 4% for FY18F (lower credit costs) but down 2-4% for FY19-20F on lower loan growth expectations.
  • Key upside/ downside risks: higher/ lower NIM or non-II.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-06
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