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

OVERSEA-CHINESE BANKING CORP (SGX:O39) | SGinvestors.io 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.



WHAT’S NEW


Moderation in pace of loan growth in 2H18.

  • 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.

Laggard in NIM expansion.

  • 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

Non-interest income under pressure.

  • 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.

Maintain cost discipline.

  • 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%.

Asset quality is stable.

  • 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.


STOCK IMPACT


NIM expansion has resumed.

  • 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.


EARNINGS REVISION/RISK

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


VALUATION/RECOMMENDATION

  • 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%).


SHARE PRICE CATALYST

  • 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



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