OCBC Bank 2Q19 Results Preview - UOB Kay Hian 2019-07-23: High Single-digit Growth In Net Interest Income

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

OCBC Bank 2Q19 Results Preview - High Single-digit Growth In Net Interest Income

  • We forecast OCBC's net profit of S$1,147m for 2Q19, marking a slight easing of 5% y-o-y and 7% q-o-q. The sequential reduction in earnings is likely to have been due to moderation in non-II, such as insurance and net trading income.
  • We have toned down our expectations for interim dividend from 25 S cents to 24 S cents as the deterioration in external outlook could prompt management towards a more conservative payout ratio. OCBC will also deploy capital to invest in the GBA.
  • Maintain BUY. Target price: S$14.62.



WHAT’S NEW


On track for mid-single-digit loan growth for 2019.

  • We expect loan growth of 1.2% q-o-q and 3.7% y-o-y in 2Q19, driven mainly by corporate loans, while residential mortgages should have remained weak. OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) supports its corporate customers who invest in hospitality, commercial real estate, student accommodation and data centres in overseas markets.

Gradual sequential uptick in NIM.

  • We expect OCBC to have raised its Mortgage Board Rate by another 15bp in Mar/Apr 19. The upside from higher mortgage rates would have been partially offset by pressure from higher fixed deposit interest rates.
  • We expect NIM expansion of 1bp q-o-q and 10bp y-o-y to 1.77% in 2Q19. We expect net interest income to increase by 9.3% y-o-y in 2Q19.

Wealth management stays resilient.

  • We expect wealth management fees to be stable at S$230m as the negative impact from the correction in the equity market would have been offset by a more buoyant outlook for investment in bonds, coupled with continued growth in AUM. We also expect steady growth from credit cards.
  • Overall, we expect net fees & commissions to be flat q-o-q but to have dipped slightly by 3% y-o-y.

A normalised quarter for Great Eastern.

  • We expect the insurance business to contribute income of S$205m (life insurance: S$165m and general insurance: S$40m). We expect net trading income to have normalised to S$120m in 2Q19 (1Q19 net trading income was exceptionally high as Great Eastern recognised profits from shareholders’ funds).

Operating expenses remain tightly controlled.

  • We expect operating expenses to have increased by 3.9% y-o-y (annual salary increment in 2Q). We expect cost-to-income ratio to have remained healthy at 43.2%, well within management guidance of 40-45%.

Asset quality remains stable.

  • Management does not see any signs of systemic weakness or deterioration. We do not expect additional provisions for the oil & gas (O&G) sector after the clean-up in 1Q19. We have factored in credit costs of 15bp, in line with management guidance of 12-15bp. We expect NPL ratio to remain stable at 1.49%.


STOCK IMPACT


Moderation in non-II.

  • We forecast net net trading income.

Moderation in expectation for interim dividend.

  • We have toned down our dividend payout ratio of 43.9%.
  • Given the deterioration in external outlook and risk of potential technical recession locally, we expect OCBC to adopt a more conservative and prudent dividend policy, which is more sustainable.

Devoting capital to expansion in GBA.

  • OCBC aims to double in loans from Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen, and Zhaoqing, Hong Kong and Macau, which forms a Southeast Asia. Management plans to invest S$200m in the GBA to build its business franchise (two thirds for technology and building IT hub, one third for adding headcount).


EARNINGS REVISION/RISK

  • We kept our 2019 net profit forecast largely unchanged.


VALUATION/RECOMMENDATION


Maintain BUY.

  • Our target price of S$14.62 is based on 1 COE: 8.25% (Beta: 1.1x) and Growth: 1.5%).


SHARE PRICE CATALYST

  • We estimate that the implementation of internal ratings-based approach (IRBA) at OCBC Wing Hang would improve OCBC’s CET-1 CAR by 0.6ppt. The exercise is expected to be complete in 2019/20.
  • Non-II from wealth management, fund management and life insurance will expand in tandem ing affluence in Asia.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-23
SGX Stock Analyst Report BUY MAINTAIN BUY 14.620 SAME 14.620



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