OCBC Bank - CGS-CIMB Research 2019-02-23: Not The Most Preferred For Now


OCBC Bank - Not The Most Preferred For Now

  • OCBC’s total income shrank the most (-8% q-o-q) among peers in 4Q18.
  • The 4Q miss was primarily due to Great Eastern Holdings’ weaker earnings and MTM losses, a reflection of OCBC’s susceptibility to a choppy market environment.
  • NPL ratio rose to 1.5% and total provisions grew more than four times q-o-q, further marring PPOP. ROE dipped to 9%, weakest among Singapore banks.
  • OCBC compensated by raising final DPS to 23 Scts vs. 20 Scts in 1H18, witha 40% payout for FY18 (FY17: 37%).
  • Downgrade from Add to HOLD.

Total income shrank the most, hit by GEH trading and wealth

  • OVERSEA-CHINESE BANKING CORP (SGX:O39, OCBC)’s net profit of S$926m in 4Q18 was 15%/17% below our/consensus expectations. FY18 formed 97%/96% of our/consensus estimates, primarily because of lower insurance contribution.
  • Shareholders’ funds in GREAT EASTERN HLDGS LTD (SGX:G07) had an MTM loss of c.S$100m.
  • Net trading income also shrank to S$9m (3Q18: S$213m) on poor bonds and equity investments.
  • Wealth management income plunged 19% q-o-q to S$607m.
  • These contributed to the bulk of the 8% q-o-q drop in total income (the most among SG banks).

Anaemic loan growth in 4Q

  • OCBC’s 4Q18 loan growth of 0.5% q-o-q was the slowest among three banks, as Greater China showed worrying signs with the first q-o-q loan contraction (-2.3%) in two years. Trade-related loans were affected as some customers stocked up before the US/China tariffs which caused some stress in general commerce.
  • Management guided for loan growth of low-to mid-single digits in 2019, still driven by property and customers’ opportunistic investments in hospitality and commercial estates in the UK and US.
  • Accordingly, we cut our loan growth estimate to 4.0% for FY19 (previously 7.2%). FY18 loan growth was 9%.

Lacklustre repricing effect on NIMs, we expect +2bp in 2019

  • Stiff time deposit competition at end-2018 resulted in 3% q-o-q growth in deposits and improved LDR of 86.4% (3Q18: 88.5%). Yet, this did not kill NIM which remained flat q-o-q at 1.72% in 4Q18. However, we had expected to see more repricing effects on NIM from mortgages as previously guided.
  • Management guided for 2019 NIM to grow by less than 5bp, as it still sees repricing effects.
  • LDR is comfortable at c.88%, in our view.

Rising NPLs but not a red flag

  • OCBC’s 4Q18 non-performing assets (NPA) grew by S$543m q-o-q as OCBC made full provisions for Coastal Oil Singapore as well as a restructured corporate account in Malaysia. Loan loss provisions jumped to S$205m (3Q18: S$49m), bringing credit costs to 32bp in 4Q18 (FY18: 11bp).
  • OCBC retains its credit cost guidance of 12-15bp for 2019.

Weak revenue data points as a key de-rating catalyst

  • We lower our Target Price, based on implied CY19F 1.2x P/BV to reflect weaker growth prospects.
  • OCBC’s previous ammunitions (wealth management, growth in China) are diminishing insurance income, capping share price performance in the near term.

Stronger capital structure?

  • OCBC’s CET-1 capital ratio rose to 14% in 4Q18 (3Q18: 13.6%), the highest in the past two years, as a contraction in market risk-weighted assets offset the effects of credit growth. While its scrip dividend scheme increases its capacity to dish out higher dividends, we believe a higher dividend payout seems unlikely in FY19.
  • OCBC guides to retain higher capitalisation (above its targeted range of a 12.5-13.5% CET-1 ratio) as a buffer against continued macro uncertainty ahead.

Upside risks

  • Rerating catalysts include the resolution of China/US trade tensions and stronger-than-expected NIM expansion.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-23
SGX Stock Analyst Report HOLD DOWNGRADE ADD 12.00 DOWN 14.000