Oversea-Chinese Banking Corporation (OCBC) - RHB Invest 2019-08-05: 2Q19 Strength In NII, But Weak For Insurance

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OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corporation (OCBC) - 2Q19 Strength In NII, But Weak For Insurance

• Stay NEUTRAL with a new SGD11.80 Target Price from SGD12.20, 5% upside plus 4.5% yield, based on 1.1x 2020F P/BV.
• Our long-term ROE assumption of 11.9% vs 1H19’s 11.7% is premised on digitisation-driven cost efficiencies while marginally narrowing NIM.
• OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s 1H19 net profit, which was up 6% y-o-y, accounted for 53% and 52% of our pre-results and consensus FY19F, and is in line.

2Q19 net profit rose 1% y-o-y

• OCBC's 2Q19 net profit rose 1% y-o-y, but was down 1% q-o-q. 2Q19 NII rose 10% y-o-y as NIM widened 12bps and loans expanded 4%. However, the weakness in profit from life insurance offset the NII strength.
• We raised 2019F net profit 4% due to higher assumption of other income, including net trading income on relative 2Q19 robustness.

OCBC guided 2H19 NIM to be close to its 2Q19 level.

• OCBC's 2Q19 NIM of 1.79% was 3bps wider q-o-q. It was also 12bps wider y-o-y. Factoring in the end-July cut in the federal funds rate (FFR) by 25bps, as well as OCBC’s internal assumption of two more FFR cuts in 2019, the bank guided for 3Q19 NIM to be 1bp wider q-o-q, and its 4Q19 NIM to be flat q-o-q.
• We forecast 2019 NIM of 1.79% and falling to 1.77% in 2020.

Mid-single digit 2019 loan growth outlook by management.

• OCBC sees weak demand for loans for investment/capacity expansion. 1H19 YTD loan growth of 2% was partly due to drawdown of loans for en bloc property developments.
• 2Q19 life insurance profit fell 26% y-o-y due to a decline in the discount rate used to value long-term insurance contract liabilities. On the other hand, wealth management fees saw an 8% y-o-y rise.
• Overall, 2Q19 total non-II was flat y-o-y.

Dividend yield to support share price.

• We forecast 2019 dividend of 50 cents/share – OCBC declared 2Q19 interim one-tier tax-exempt dividend of 25 cents/share, with the scrip dividend scheme applicable.
• Management guided for future dividend payout ratios of 40-50%. Our 2019F 4.5% yield should help support the share price.

Our TP is based on 1.1x 2020F P/BV.

• 1H19 ROE was 11.7%. Our OCBC valuation is based on long-term ROE assumption of 11.9%. This yields a 2020F which we derive our new Target Price of SGD11.80.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-05

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 11.80 DOWN 12.200