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

OVERSEA-CHINESE BANKING CORP (SGX:O39)

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.

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).

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%.

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.

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.

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.

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.

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