Oversea-Chinese Banking Corporation (OCBC) - UOB Kay Hian 2018-10-15: 3Q18 Results Preview ~ Growth From Developed Markets

OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corporation (OCBC) - 3Q18 Results Preview: Growth From Developed Markets

We expect OCBC’s loan growth to moderate to 1.2% q-o-q and 9.9% y-o-y with expansion driven by developed markets Singapore and Hong Kong in 3Q18.
NIM expansion has resumed in 2H18 due to higher interest rates for mortgages and trimming of surplus US$ fixed deposits. Unfortunately, 3Q18 was hampered by weakness in fees as high net worth clients adopted risk-off mode.
We forecast net profit of S$1,099m for 3Q18, down 9.1% q-o-q but up 4.0% y-o-y.
Maintain BUY. Target price: S$14.05.

We expect Oversea-Chinese Banking Corporation (OCBC) to report healthy loan growth of 1.2% q-o-q and 9.9% y-o-y in 3Q18, a much moderated pace compared with 1H18. The expansion was driven by residential property developers, mortgages, and OCBC Wing Hang.
We expect loan growth from Malaysia and Indonesia to be muted due to uncertainties over government policy and depreciation of the Indonesian Rupiah respectively.

We expect NIM to expand 2bp q-o-q to 1.69%, helped by:
1. OCBC raising interest rates for mortgages since August with full impact in 4Q18, and
2. OCBC trimming surplus US$ fixed deposits (US$ loan-to-deposit ratio of 65.6% in 1Q18).

~ SGinvestors.io ~ Where SG investors share

We expect fees to decline 5.6% q-o-q but be flat y-o-y. Wealth management fees were affected as high net worth clients adopted risk-off mode. We also expect loan and trade related fees to be lacklustre due to the slowdown in loan approvals and tapering off of trade finance activities.
We expect contributions from insurance to be slightly affected by mark-to-market losses. We have factored in contributions of S$150m for life insurance and S$40m for general insurance. Also, net trading income is likely to be weaker.

We expect operating expenses to increase 2.8% y-o-y. Cost-to- income ratio is estimated at 43.2%, within management’s target of 40-45%.

We expect NPL ratio to be stable at 1.37%. NPLs caused by the downturn in the oil & gas sector have already been recognised and sufficient provisions have been set aside.
There are no signs of stress for the SME portfolio. Credit cost is expected to remain low at 12bp for 3Q18 (2Q18: 3bp), at the lower end of guidance of 12- 15bp for 2018.

We forecast net profit of S$1,099m for 3Q18, down 9.1% q-o-q but up slightly 4.0% y-o-y. We expect loan growth to be largely driven by developed markets, such as Singapore and Hong Kong.
We are encouraged by the resumption and catch-up in NIM expansion in 2H18. Unfortunately, 3Q18 was hampered by weakness in non-interest income.

We raised our 2018 net profit forecast by 1% to S$4,485m due to lower credit costs in 2H18.

Maintain BUY. We have rolled forward our valuations to 2019. Our target price of S$14.05 is based on 1.37x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 10.9%, COE: 8.25% (Beta: 1.1x) and Growth: 1.0%).

We estimate that the implementation of internal ratings-based approach (IRBA) at OCBC Wing Hang would improve OCBC’s CET-1 CAR by 0.6ppt. The exercise is scheduled to be completed in 2019/20.
Non-interest income from wealth management, fund management and life insurance will em with growing affluence in Asia.

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-15

SGX Stock Analyst Report BUY MAINTAIN BUY 14.05 UP 13.680