Oversea-Chinese Banking Corporation (OCBC) - RHB Invest 2019-05-13: Wider NIM Amidst Sequentially Flat Loans

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OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corporation (OCBC) - Wider NIM Amidst Sequentially Flat Loans

• Keep NEUTRAL and SGD12.20 Target Price (1.12x 2020F P/BV), which implies 8% upside plus 4% FY19F yield.
• Our long-term ROE assumption of 12% is premised on net interest income growth from loan expansion and NIM widening, plus digitisation-driven cost efficiencies.
• OCBC’s 1Q19 results are in line with our expectations. This report is an update post the bank’s analyst briefing.

Results in line.

• OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)'s 1Q19 net profit of SGD1.23bn was up 11% y-o-y (+33% q-o-q), at 26% of our and Street’s FY19 estimates.

OCBC guides for 2019 NIM increase.

• OCBC's 1Q19 NIM of 1.76% was 4bps wider q-o-q and 9bps wider y-o-y. The y-o-y increase was due to higher asset yields and hike in gapping income from money market placements. Loan repricing contributed to the q-o-q NIM widening. Management guided for 2019 NIM to be ~5bps wider than 2018’s 1.7%, and sees 2Q19 NIM being higher q-o-q. We forecast 2019 NIM of 1.76%.
• OCBC's 1Q19 loans expanded 0.3% q-o-q, with building & construction loans up by a robust 4% q-o-q. We forecast 2019 loan growth of 4.5%.
• Wealth management income surged 52% q-o-q to SGD921m, driven by higher insurance and private banking income. Bank of Singapore’s AUM rose 6% q-o-q to USD108bn. We are positive on wealth management income’s continued growth going forward.

1Q19 specific credit cost of 32bps was sharply higher than 1Q18’s 2bps.

• The majority of 1Q19 allowances were for loans to oil and gas support vessels and services (ie OSVs), which were already classified as NPLs. Despite the recovery in fuel oil prices, the OSV sector did not see a corresponding increase in vessel employment or rise in charter rates.

Our long-term ROE assumption is 12%.

• OCBC's 1Q19 ROE was at 12%, as there were significant gains from net trading income. We do not assume these gains can be sustained. On the other hand, digitisation efforts will help to improve efficiency.
• Overall, we have assumed long-term ROE of 12%.
• Downside risks to our forecasts include higher impairment charges and a fall s rate, which could dampen NIM.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-13

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 12.200 SAME 12.200