Oversea-Chinese Banking Corp (OCBC) - RHB Invest 2019-04-22: Expect Wider 1H19 NIM, But Valuation Fair


Oversea-Chinese Banking Corp (OCBC) - Expect Wider 1H19 NIM, But Valuation Fair

  • Maintain NEUTRAL with higher SGD12.20 Target Price (from SGD10.96), based on 2020F P/BV of 1.12x, giving 4% upside plus 4% yield.
  • We assumed a long-term ROE of 12% (vs 2018’s 11.5%). This would be driven in the short term by sequential NIM expansion and in the next 2-3 years by digitisation-driven expense management.
  • We spoke with OCBC recently – key takeaways are appended below. Prefer UOB and DBS.

Home loan rate rise in 1Q19 to help raise lending yield.

  • OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) raised its OCBC home rate in Jan/Feb 2019 – this will raise lending yield for a portion of 1Q19 as more than half of OCBC housing loans are priced off this.
  • Lending yield should be even stronger in 2Q19 as the full 3-month impact will be captured.

CASA accounts for 66% of total deposits.

  • Industry-wide fixed deposit interest rates have risen, but interest rates for CASA have remained relatively flat – and this helps to cap the increase in OCBC’s cost of funds.

We forecast 2019 NIM of 1.76%

  • We forecast 2019 NIM of 1.76%, an improvement over 2018’s 1.70% due to higher lending yields offsetting the rise in cost of funds. We expect to see continued NIM widening in 2020 and 2021, although the magnitude of widening should be more subdued.
  • Despite forecasted OCBC 2019 NIM widening, we believe its NIM will remain narrower than peers.

Uninteresting 1Q19 non-interest income expected.

  • The 1Q18 base for non-interest income was high, and it would be challenging for 1Q19 non-interest income to show growth. OCBC’s Bank of Singapore, which caters to clients with at least USD5m, saw 2018 AUM rise 3% to USD102bn.
  • Whilst AUM could have further increased since then, 1Q19 wealth management fees are likely to be soft y-o-y.

We raised 2019F net profit by 7% to SGD4.7bn

  • We raised 2019F net profit by 7% to SGD4.7bn, mainly due to net interest income forecast being increased by 7%. We introduce 2020 and 2021 forecasts in this report. See OCBC's financial data in attached PDF report. 

Our long-term ROE assumption is 12%.

  • This compares with 2018 ROE of 11.5%. NIM expansion in 1H19 and digitisation efforts over the next 2-3 years are contributing factors to ROE enhancement.
  • Downside risks to our forecasts include higher impairment charges and weaker-than-expected NIM.
  • Upside risks include better-than-expected NIM and stronger loan growth.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-04-22
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 12.20 UP 10.960