OCBC Bank - RHB Invest 2019-09-27: Softer NIM And Possible M&A To Limit Upside


OCBC Bank - Softer NIM And Possible M&A To Limit Upside

  • Maintain NEUTRAL with unchanged SGD11.50 Target Price, 7% upside, 4.6% yield, based on 1.07x 2020F P/BV.
  • The US Federal Reserve cut the federal funds rate (FFR) at the mid-September FOMC meeting. Going forward, more cuts are expected. Given the historical positive correlation between the US FFR and 3-month SIBOR, we expect further softness in the latter. This is negative for the NIMs of the 3 Singapore banks.
  • Market talk of OCBC’s interest in buying Bank Permata may also cap OCBC's share price. Our Top Pick is UOB (SGX:U11).

Bloomberg reports indicate that OCBC is interested to acquire Bank Permata

  • Recent Bloomberg reports indicate that OCBC Bank (SGX:O39) is interested to acquire Bank Permata (BNLI IJ).
  • If OCBC is successful in acquiring Bank Permata, and merges with OCBC NISP, it will become Indonesia’s fifth largest bank – we believe such a scenario will be a positive for OCBC’s long term growth in Indonesia. However, there is market talk of Sumitomo Mitsui Banking Corp (SMBC) joining the bid to acquire Bank Permata – a move in line with the group’s plan to expand presence in more Asian countries outside of Japan.

Our sensitivity analysis shows that OCBC has sufficient capital to acquire Bank Permata.

  • Assuming an aggressive scenario where OCBC acquires 100% of Bank Permata at IDR1,700/share cash (a 47% premium to Bank Permata’s last traded price of IDR1,155), this would hypothetically lower OCBC’s CET1 ratio to 12.5% (from pre-acquisition’s 14.4%), which is still higher than regulatory requirements.

Further FFR cuts to narrow OCBC’s NIM.

  • The US Fed cut the FFR in mid- September. The consensus is for further cuts ahead. This should translate to further softness in the 3-month SIBOR – current 3-month SIBOR of 1.88% is already 10bps lower than the 2Q19 average of 1.98%. We forecast OCBC 2020 NIM of 1.77%, lower than 2Q19’s 1.79%.

OCBC’s relatively high percentage loan exposure to Greater China not a positive.

  • 24.2% of OCBC’s loans are to Greater China, vs DBS Group (SGX:D05)’ (NEUTRAL, Target Price: SGD25.30) 29.9% and UOB (SGX:U11)’s (BUY, Target Price: SGD29.50) 15.7%. With the US-China trade war adversely affecting China’s economic growth, OCBC’s relatively large percentage exposure is not a positive, as there is a risk of higher NPLs.

Dividend yield to support share price.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-09-27
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 11.500 SAME 11.500