Oversea-Chinese Banking Corp Ltd - Phillip Securities 2019-02-25: Further Upside For NIM Expansion

OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corp Ltd - Further Upside For NIM Expansion

OVERSEA-CHINESE BANKING CORP (SGX:O39, OCBC)'s FY18 revenue and PATMI missed our estimates by 3.5% and 5.2% respectively due to a decline in net gains from investment securities and other income.
FY18 NIM met our expectations by expanding 5 bps y-o-y to 1.70%.
FY18 loans grew 8.6% y-o-y, driven by Building & Construction (+51.2% y-o-y) and Greater China loans (+8.9% y-o-y).
FY18 NPL ratio remained stable at 1.5% (FY17: 1.4%); while credit costs normalised to 11 bps (FY17: 27 bps).

Proposed final dividend increased to 23 cents per share, bringing full-year dividend to 43 cents per share (FY17: 37 cents per share).
Maintain BUY with an unchanged target price of S$13.70.

NIM expansion was boosted by higher margins in Singapore, Malaysia and Greater China. Loan, interbank and other assets yields surged 41 bps, 123 bps and 32 bps y-o-y while the cost of funds increased 50 bps y-o-y.
Given the recent dovish tone on future rate hikes by the U.S. Federal Reserve, we lower our NIM estimates for FY19e from 1.8% to 1.74%. We expect mortgage repricing to support NIM expansion.

After enjoying three quarters of c.16% y-o-y loan growth, Greater China’s 4Q18 loan growth slowed to 8.9% y-o-y. Loans expanded 8.3% y-o-y in Singapore and 5.0% y-o-y in Malaysia. Housing loans contracted for the second consecutive quarter due to the onset of property cooling measures. OCBC’s LDR declined to 86.4% (3Q18: 88.5%) due to the shoring up of deposits at year end which resulted in a flat q-o-q NIM.
We believe that the sluggish global economic growth and slowdown in Singapore’s mortgage loan growth will make it challenging for loan growth in 2019. Hence we lowered our FY19e loan growth estimates from 7.5% to 4.4%, in line with guidance of low-mid single-digit growth.

Allowances amounted to S$288mn and fell 57% y-o-y due to provisions set aside for O&G sector last year.

GREAT EASTERN HLDGS LTD (SGX:G07) sustained a marked to market loss of almost S$100mn in the investments carried. Also, there was investment gain of almost S$300mn last year, and there was no such substantial gain in FY18.

Majority of the increase was due to higher NPL formation booked in Hong Kong and a corporate account restructuring in Malaysia, which they do not anticipate further losses.
OCBC had expected more investments by oil majors following the higher oil prices would increase which should result in a higher utilisation rate and subsequently higher charter rates. However, the assumption did not realise, and the cash-flow projections that rely on better charter rates did not increase. Hence OCBC reassessed its O&G portfolio and took in specific provisions in 4Q18.

The increase in CIR was due to a fall in trading income led by unrealised marked to market losses from Great Eastern’s investment portfolio.

We continue to be positive on the NIM expansion in 2019, but we tone down our FY19e NIM expectations due to the US Federal Reserve tapering off rate hikes. Attention is to be directed on the property sector to support loan growth in FY19. We expect overall loan growth in FY19 to be slower than FY18 due to trade tensions, property cooling measures and rising interest rates.
OCBC's PATMI is stable at a mid-high single digit growth rate; and any further upside will depend on capital markets improving for investment and wealth management business turn around. We believe that heavier reliance on interest income should provide stability and predictability to revenue.

Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-02-25

SGX Stock Analyst Report BUY MAINTAIN BUY 13.70 DOWN 13.70