OVERSEA-CHINESE BANKING CORP (SGX:O39)
Oversea-Chinese Banking Corp (OCBC SP) - 3Q18: Making A Comeback On Dividend Payout
- Positive surprise from NIM expansion of 5bp q-o-q, helped by an interest rate hike for residential mortgages in Singapore since August. OCBC Wing Hang's NIM expanded 5bp q-o-q to 1.61%. OCBC NISP's NIM expanded 18bp q-o-q to 4.26%.
- OCBC’s CET-1 CAR improved 0.4ppt q-o-q to 13.7%, at the higher end of the target range of 12.5- 13.5%.
- OCBC could move payout ratio towards mid-40%, bringing 2019F DPS to 48 cents, which provides a dividend yield of 4.5%.
- Maintain BUY and target price of S$14.05.
RESULTS
- Oversea-Chinese Banking Corporation (OCBC) reported net profit of S$1,245m for 3Q18 (+12.4% y-o-y), 13.3% above our forecast of S$1,099m.
Growth from developed markets.
- Loans expanded 1.7% q-o-q and 10.4% y-o-y in 3Q18. The sequential expansion was driven by loans in Singapore and Greater China which grew 1.4% and 1.1% q-o-q respectively, with broad-based growth from the building & construction, general commerce and transport & communications sectors.
- Loan growth from Malaysia and Indonesia was muted at 0.8% and 0.4% q-o-q respectively due to uncertainties over government policy and depreciation of the Indonesian rupiah.
Resurgence in NIM.
- NIM expanded 5bp q-o-q to 1.72%. OCBC raised interest rates for residential mortgages in Singapore since August with full impact expected in 4Q18. It also trimmed surplus US$ fixed deposits (US$ loan-to-deposit ratio has improved from 65.6% in 1Q18 to 76% currently).
- OCBC Wing Hang's NIM expanded 5bp q-o-q to 1.61%.
- OCBC NISP's NIM expanded 18bp q-o-q to 4.26%.
Fees increased 2.9% yoy.
- Contribution from wealth management declined 2.7% q-o-q but increased 5.9% y-o-y. High net worth clients adopted a risk-off mode.
- Contributions from credit cards and trade-related fees grew 15% and 10.7% y-o-y respectively.
Satisfactory contributions from other non-interest income.
- Contribution from insurance was decent at S$225m, not unduly affected by volatility in financial markets. Weighted new sales for life insurance increased 14% y-o-y. New business embedded value margin was lower at 34.8% due to a shift towards single premium products during the quarter. Net trading income increased 80.5% y-o-y to S$213m due to customer flows.
Asset quality remains benign.
- NPL balance increased 1.8% q-o-q while NPL ratio was stable at 1.38%. Total provisions were low at S$49m due to write-back in general provisions of S$45m based on methodology for computing expected credit loss (ECL).
STOCK IMPACT
Continues to benefit from re-pricing of residential mortgages.
- OCBC Wing Hang raised its prime lending rate by 25bp to 5.5% in Oct 18. Management expects 60% of its mortgage portfolio to benefit from the hike in prime lending rate. Its loan-to-value ratio for residential mortgages in Hong Kong is low at 40% while NPL ratio is very low at 0.1%.
Cautious outlook.
- Management guided mid-to high-single-digit loan growth for 2019. It sees normalised credit cost at 12-15bp for 2019.
Small exposure to China.
- The Chinese government is committed to deleveraging on a “stabilised” basis, ie maintaining rather than reducing the current level of leverage. Management sees China preserving GDP growth at 6% in the near term.
- Management estimated a full blown trade war with the US imposing blanket tariff on all imports from China to reduce China’s GDP growth by 0.7ppt in 2019. OCBC has loans of S$66b for Greater China, of which only S$5b (1.9% of total loans) relates to China (onshore), predominantly state-owned companies.
Growth momentum intact at Bank of Singapore.
- AUM expanded by US$3b or 3% q-o-q to US$105b. The inflow of net new money is strong, which offsets the negative impact from mark-to-market on its existing AUM.
- OCBC continues to build a larger base of relationship managers, which will contribute to future growth of its wealth management business.
EARNINGS REVISION/RISK
- We maintain our earnings forecast for 2019.
VALUATION/RECOMMENDATION
Maintain BUY.
- Our target price of S$14.05 is based on 1.37x 2019F P/B, derived from the Gordon Growth Model (ROE: 10.9%, COE: 8.25% (beta: 1.1x), 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 with growing affluence in Asia.
Jonathan Koh CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2018-11-02
SGX Stock
Analyst Report
14.050
SAME
14.050
