Oversea-Chinese Banking Corp (OCBC) - RHB Invest 2019-07-17: Likely 2Q19 Q-o-q NIM Expansion But Priced In

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OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corp (OCBC) - Likely 2Q19 Q-o-q NIM Expansion But Priced In

• Still NEUTRAL with unchanged SGD12.20 Target Price based on 1.12x 2020F P/BV, 6% upside plus 3.8% FY19F yield.
• This report spells out our expectations for OCBC’s 2Q19 results, which will be released on 2 Aug before trading hours.
• Expected 2Q19 marginal sequential growth for both loans and NIMs are positives, but these are largely priced in.

Mild sequential 2Q19 loan expansion expected.

• OCBC (SGX:O39) said low to mid-single digit 2019 loan growth is on track. Whilst housing loans are soft, overall 2Q19 loans should have expanded marginally q-o-q.

Repricing of home mortgage rates likely to widen 2Q19 NIM.

• The housing loan rate increase would have contributed to sequentially higher 2Q19 lending yields. However, the 2Q19 NIM sequential widening is seen to be mild, and less than the 4bps for 1Q19 sequential widening.
• Indications point to continued good asset quality, as there is no distress in any particular sector. We believe 2Q19’s NPL ratio should be flattish q-o-q.

Likelihood of a US July.

• Separately, US chair that “manufacturing, trade, and investment are all around the world”. Powell inflation was too low. Markets saw his comments as at end.
• Whilst we raised our 2019 NIM assumption by 2bps to 1.78%, we lowered our 2020 and 2021 NIM assumptions – down 4-6bps to 1.76% and 1.75%. On a brighter note, lower US interest rates could stimulate more market activities, helping to grow wealth management fees. After overall fine-tuning, we cut 2019F, 2020F and 2021F net profit by 2% each.
• Our long-term ROE assumption is lowered to 11.9% from 12% vs 1Q19’s 12% (the strong 1Q19 net trading income, which contributed to robust 1Q19 ROE, is unlikely to be sustained). Our ROE assumption takes into account long term revenue growth from wealth management and digitisation-driven cost efficiencies.

OCBC is valued.

• Although FY19F yield of 3.8% is higher than 1.98%, it is lower.
• We have a target P/BV (2020) of 1.12x, which is slightly lower than the 6-year average of 1.24x. We believe OCBC’s lower dividend payout ratio (vs peers) could keep its P/BV below peers.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-07-17

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 12.200 SAME 12.200