OCBC Bank - Maybank Kim Eng 2019-05-15: Not Ready For Prime-Time

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

OCBC Bank - Not Ready For Prime-Time


Numbers look good. But can they sustain?

  • OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) surprised MKE/Street in 1Q19; While earnings were strong, it was driven by trading income, mark-to-market insurance profits and gapping margins – line items where external market forces contribute a large share of the outcome.
  • Structural contributors, such as interest income and fee income were weaker; This lowers earnings visibility.
  • Persistently lower dividend payouts and the highest CET1 ratio amongst peers gives OCBC a sizable capital wallet, which we estimate to be over SGD5b – 10% of market cap. See OCBC's dividend history. With management having stated it may use this capital base for ‘offensive opportunities’, there is further uncertainty on execution.
  • Following results, we raised 2019E-2021E earnings by 1-3%. We also increased our multi-stage DDM (COE 9.7%, 3% terminal) based Target Price from SGD10.73 to SGD11.07. 
  • Maintain HOLD.



Driven by market conditions

  • We estimate ~35% of OCBC’s 1Q19 income was driven off market-linked sources. These are likely to see significant volatility as macro conditions change from mark-to-market requirements.
  • We have yet to see any structural improvements in more visible sources of income, such as fees from overseas trade flows, strengthening SME franchise or new revenue streams from technology.


Big wallet with an urge to shop?

  • At 14.2%, OCBC’s CET1 ratio is the highest amongst peers. Assuming a more comfortable ratio of 13.5% and 50% of 2019E dividends are issued as scrip, we estimate OCBC should have SGD5.1b in excess capital. This is a sizable war-chest, which management has not ruled out for ‘offensive’ uses. But a large acquisition will result in significant execution risks and earnings uncertainty, in our view.


Maintain HOLD

  • Taking in to account stronger mark-to-market income in 1Q19 together with the current macro outlook, again, we raise OCBC’s 2019-2021E earnings by 1-3%. Our multi-stage DDM (COE 9.7%, 3% terminal) Target Price has been raised from SGD10.73 to SGD11.07.
  • Maintain HOLD.
  • See also sector report: Singapore Banks - Through the Fog Of War.





Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-15
SGX Stock Analyst Report HOLD MAINTAIN HOLD 11.07 UP 10.730



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