Oversea-Chinese Banking Corp (OCBC) - UOB Kay Hian 2019-02-25: 4Q18 One-Off Hit From Net Trading Income

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

Oversea-Chinese Banking Corp (OCBC) - 4Q18: One-Off Hit From Net Trading Income

  • Net trading income was affected by unrealised mark-to-market losses in Great Eastern’s investment for shareholders’ fund. Higher NPL formation and credit costs also affected OCBC’s 4Q18 results.
  • OCBC has declared a final dividend of 23 S cents, up 21.1% y-o-y. There are good prospects for further increase in dividend payout as CET-1 CAR at 14% is the highest among peers, and this could be improved by implementing IRBA for OCBC Wing Hang.
  • Maintain BUY and target price of S$13.85.



RESULTS


Supporting customers in overseas expansion.

  • Loans expanded 8.6% y-o-y and 0.4% q-o-q. On a y-o-y basis, loan growth was powered by Greater China (+8.9% y-o-y) and the rest of the world (+22.9% y-o-y). OCBC also benefitted from growth in Building & Construction (+51.2% y-o-y).
  • NIM expanded 5bp y-o-y but was flat q-o-q at 1.72%. Net interest income grew at single-digit rate of 6.7% y-o-y.

Market-sensitive sources of fees were affected.

  • Fees & commissions dropped 3.5% y-o-y and 5.6% q-o-q. Contribution from credit cards, loan-related and trade & remittances grew 7.1%, 2.9% and 10.7% y-o-y respectively.
  • However, wealth management fees, which accounted for 38% of total fees & commissions, declined 12.7% y-o-y and 13.5% q-o-q due to subdued investment sentiment.

Suffered from adverse movement in the equity market.

  • Net trading income was only S$9m due to unrealised mark-to-market losses in GREAT EASTERN HLDGS LTD (SGX:G07)’s investment for shareholders’ fund. Excluding Great Eastern, trading income from banking operations would have increased 5% y-o-y.

Costs tightly controlled.

  • Total operating expenses were flat y-o-y. Staff costs increased by only 3% while other operating expenses declined 9.4% y-o-y.

Hit by higher NPLs.

  • NPL balance increased by S$423m or 12.4% q-o-q due to deterioration for General Commerce (up S$385m q-o-q). The increase in NPLs in 4Q18 was caused by:
    1. trading company in Hong Kong, and
    2. an oil & gas company in Malaysia.
  • NPL formation increased to 137bp (3Q18: 53bp), but OCBC has also stepped in write-offs of 49bp (3Q18: 13bp). Provisions increased 86% q-o-q (credit costs: 32bp) due to full provision for the trading company in Hong Kong and additional provisions for legacy NPLs in oil & gas support vessels.
  • OCBC has declared a final dividend of 23 S cents, which represents an increase of 21.1% y-o-y. Management has turned on the scrip dividend scheme with issue price for new shares at a discount of 10%. Total dividends of 43 S cents represents payout ratio of 41%.


STOCK IMPACT


Cautious outlook.

  • Management expects global economic growth to slow due to concerns over continued trade and geopolitical tensions and rising policy risks in advanced economies.
  • OCBC’s strong capital and funding base and stringent cost control will enable the bank to continue expanding its franchise in key markets.

Expects continued growth in 2019.

  • Management guided for low to mid single-digit loan growth for 2019. There should be slight growth in loan demand from the property sector. OCBC will also support customers investing in hospitality, commercial real estate, student accommodation and data centres overseas, taking advantage of short-term weaknesses in cities such as London and New York.
  • Management expects NIM expansion in 2019, albeit smaller than the 5bp achieved last year. Credit costs are expected to be stable at 12-15bp. Management targets to achieve ROE of 12% for 2019.

Anticipates recovery from wealth management.

  • AUM increased by 3% to US$102b in 2018 despite negative impact from mark-to-market in 4Q18. Bank of Singapore (BOS) achieved net new money of US$10b in 2018, boosted by growth from Greater China. While high net worth clients turned risk averse in 4Q18, the situation has normalised in Jan 19.
  • The State Council has released the blueprint for development of the Greater Bay Area, encompassing nine cities in Guangdong Province, Hong Kong and Macau. The increase in flow of trade and investment within the Greater Bay Area is positive for BOS' private banking business.
  • OCBC also targets the emerging affluent segment (population: 45m) in Indonesia.

Prepared for adverse change in operating environment.

  • OCBC's CET-1 CAR is already more than adequate at 14.0%. Management explained that the scrip dividend provides extra buffer against uncertainties arising from:
    1. slower economic growth around the world,
    2. geopolitical tension and trade conflict, and
    3. threat of a hard Brexit.
  • Should management's concerns fail to materialise, the surplus capital could then be deployed for expansion in its core commercial banking, wealth management and life and general insurance businesses.


EARNINGS REVISION/RISK

  • We maintain our earnings forecast for 2019.


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our target price of S$13.85 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 IRBA at OCBC Wing Hang would improve OCBC’s CET-1 CAR by 0.6ppt. The exercise is scheduled to be completed in 2H20.
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-25
SGX Stock Analyst Report BUY MAINTAIN BUY 13.850 UP 13.82



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