Oversea-Chinese Banking Corp (OCBC) - UOB Kay Hian 2019-05-13: 1Q19 Record PPOP; Strong Capital Base To Guard Against Uncertainties

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

Oversea-Chinese Banking Corp (OCBC) - 1Q19: Record PPOP; Strong Capital Base To Guard Against Uncertainties

  • OCBC reported a record total income of S$2,676m (+15% y-o-y) and record PPOP of S$1,556m (+22% y-o-y), driven by NIM expansion of 9bp y-o-y, robust contribution from insurance and strong net trading income. It has conservatively reduced collateral valuations due to structural changes and the prolonged downturn in the oil & gas sector.
  • Maintain BUY and target price of S$14.62.



OCBC's 1Q19 RESULTS


NIM expansion from hike in mortgage rates.

  • Loans expanded 4.9% y-o-y and 0.4% q-o-q driven by the corporate and commercial segments. NIM expanded 9bp y-o-y and 4bp q-o-q to 1.76% due to loan re-pricing in Singapore and improvement in loans-to-deposits ratio from 84.4% to 87.1% (up 2.7ppt y-o-y). OCBC raised its mortgage board rate by 55bp effective Jan 19. Net interest income grew 8.4% y-o-y.

Fees and commissions dropped 8% y-o-y due to high base.

  • Contribution from wealth management rebounded 15% q-o-q, but declined 13% y-o-y due to a high base created by the blockbuster launch of bespoke funds in 1Q18. AUM expanded 6% y-o-y to US$108b due to net new money inflows and improved asset valuations. Fees from credit card and investment banking grew 8% and 17% y-o-y respectively.

Rebound from insurance after dismal 4Q18.

  • Contribution from life and general insurance increased 34% y-o-y. Great Eastern (SGX:G07)’s operating profit from the insurance business was down 8% y-o-y to S$150m. Great Eastern benefitted from a rebound in the equity and bond markets as non-operating profit reversed to a profit of S$75m (1Q18: - S$9m) while profit from shareholders' funds surged to S$124m (1Q18: S$1m).
  • Net trading income rebounded to S$285m (+205% y-o-y) due to improved customer flows and better financial market conditions.

Record PPOP.

  • Pre-provision operating profit (PPOP) increased 22% y-o-y to a record S$1,556m.

Asset quality stable.

  • NPL balance inched marginally higher by S$35m or 0.9% q-o-q. NPL ratio was relatively unchanged at 1.50%. Credit costs further increased from 32bp in 4Q19 to 39bp in 1Q19. Specific provisions were at S$231m, mainly for loans to existing oil & gas support vessels already classified as NPLs.


STOCK IMPACT


Painted 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 as well as stringent cost control will enable the bank to continue expanding its franchise in key markets.

Expect more NIM expansion in 2Q19.

  • Management maintains its guidance of mid-single-digit loan growth for 2019. The bank expects NIM expansion at a smaller quantum of 1-2bp q-o-q in 2Q19.

Conservatively marking down vessels pending employment to scrap value due to prolonged downturn.

  • Management had anticipated a recovery in exploration and drilling activities once crude oil prices had bounced back to US$60-70/bbl. However, the anticipated recovery did not materialise even after crude oil prices had recovered. Thus, management took the decision to further mark down the valuation of collaterals for its oil & gas exposures.
  • 70% of specific provisions incurred in 1Q19 were related to offshore support vessels already classified as NPLs. They were categorised under two buckets:
  • Vessels gainfully employed (70% of oil & gas NPLs) - Marked down to 55-60% of refreshed valuations (40-45% discount).
  • Vessels pending employment (30% of oil & gas NPLs) - Marked down to 3% of refreshed valuations, based on scrap value at 6% of refreshed valuation minus cost to transport vessels to scrap yard.
  • Management has revised guidance for credit costs for 2019 from 12-15bp to 19-22bp (shifted higher by 7bp), after factoring in higher credit costs of 39bp in 1Q19.

Ready to pounce should the opportunity arise.

  • OCBC's strong CET-1 CAR of 14.2% puts the bank in good stead to weather uncertainties that arise from the US-China trade conflict. OCBC could also deploy surplus capital for inorganic expansion should the opportunity arise. OCBC will deepen its presence in its core businesses (commercial banking, private banking and insurance) and core markets (Singapore, Malaysia, Indonesia and Greater China).
  • Management will look at increasing its stake in Bank of Ningbo (leveraging on liberalisation of the financial services sector) and setting up a Bank of Singapore (BOS) branch at Qianhai.
  • Management expects dividend payout ratio to stay within its policy of 40% to 50%.


EARNINGS REVISION/RISK

  • We raised our earnings forecast for 2019 by 2.2% after factoring in the better-than-expected results for 1Q19.


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our target price of S$14.62 is based on 1.42x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 11.1%, COE: 8.25% (Beta: 1.1x) and Growth: 1.5%). See attached PDF report for key metrics.


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/ 2019-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 14.62 UP 14.120



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