OVERSEA-CHINESE BANKING CORP
SGX:O39
Oversea-Chinese Banking Corp (OCBC) - 2Q18 Potential To Gradually Raise Dividends
- Oversea-Chinese Banking Corporation (OCBC)'s 2Q18 net profit grew 16% y-o-y, driven by strong treasury-related income from customer flows, cost discipline and low credit cost.
- Management expects a significant portion of mortgages to be re-priced in 3Q18, which would bolster NIM expansion.
- The final dividend could be 22 cents if OCBC pays out 40% of earnings as dividends in 2018.
- Maintain BUY with a higher target price at S$13.68.
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RESULTS
- Oversea-Chinese Banking Corporation (OCBC) reported net profit of S$1,209m for 2Q18, up 16% y-o-y, and 10.5% above our forecast of S$1,094m.
- Net interest income grew 7.8% y-o-y. Loans expanded 2.3% q-o-q and 10.3% y-o-y. The sequential expansion was led by Greater China and the building & construction sector. NIM was flat q-o-q but expanded 2bp y-o-y to 1.67%, driven by Singapore and Malaysia operations. Unfortunately, OCBC Wing Hang and OCBC NISP suffered NIM compression of 5bp and 16bp q-o-q to 1.56% and 4.08% respectively due to higher cost of deposits.
- High net worth clients turned more cautious. Fees & commissions grew at a slower 5.3% y-o-y (1Q18: 11.4% y-o-y). Contribution from wealth management declined 11.8% q-o-q. AUM was flat q-o-q at US$102b due to the correction in financial markets. Fees from trade, investment banking and service charges grew healthily by 12%, 27% and 15% y-o-y respectively.
- Great Eastern maintained strong contribution. Contribution from insurance was flat y-o-y at S$234m (life insurance: S$191m, general insurance: S$43m). Operationally, Great Eastern did well with total weighted new sales increasing 28% y-o-y and NBEV margin was healthy at 42.7%.
- Treasury-related income rebounded. Net trading income was strong at S$192m (1Q18: S$94m) due to treasury-related income from customer flows. Gains from investment securities were only S$2m compared to S$54m in 2Q17.
- Maintained cost discipline. Staff cost increased only 1.4% y-o-y. Cost-to-income ratio improved 2.3ppt q-o-q to 41.9%.
- Stable asset quality. Total provisions were a paltry S$21m, or 3bp, due to write-back of specific provisions for exposure to the oil & gas sector in Singapore. NPL formation was benign while NPL ratio was unchanged at 1.38%. Loans that are not overdue accounted for 48% of NPLs, demonstrating that OCBC is conservative in recognition of NPLs.
STOCK IMPACT
Outlook.
- Management cautioned that the operating environment is increasingly challenging and OCBC is watchful of the severe implications from the escalating trade tensions. Management maintained guidance of high-single-digit loan growth for 2018. It sees asset quality as benign because risk from the O&G sector is contained. Management guided normalised credit cost at 15-20bp.
Positive impact on NIM from re-pricing of mortgages.
- Management expects a significant portion of its mortgages to be re-priced in 3Q18, especially those pegged to long-term deposit rates and prime rates. It ensures that upward movements in SIBOR and SOR are sustainable before it adjusts the interest rates for mortgages. Mortgages accounted for 26.1% of OCBC's total loans.
- Sales of private residential housing have tapered off by about 10% in July. Management see resilient demand from first-time homebuyers. It expects growth in housing loans at mid-single-digit due to drawdown from existing housing loans.
Room to gradually increase dividends.
- OCBC declared an interim dividend of 20 cents/share, representing a conservative payout ratio of 36%. The scrip dividend scheme is applicable for the interim dividend and the issue price of new OCBC shares is set at a discount of 10% to weighted average prices during the price determination period (15-17 August).
- OCBC intends to maintain dividend payout ratio at 40-50%. Assuming OCBC pays out 40% of earnings as dividends in 2018, the final dividend would be 22 cents/share.
EARNINGS REVISION/RISK
- We raise our net profit forecast for 2018 by 1.8% after incorporating the good 2Q18 results. We reduce our net profit forecast for 2019 by 2.1% after assuming a slower loan growth of 6.1% (previously 8.2%).
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$13.68 is based on 1.42x 2018F P/B, derived from the Gordon Growth Model (ROE: 11.1%, 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.
- anagement, fund management and life insurance will with growing affluence in Asia.
Andrew CHOW CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2018-08-07
SGX Stock
Analyst Report
13.68
Up
13.520
