OVERSEA-CHINESE BANKING CORP (SGX:O39)
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.
- We forecast 2019 dividend of SGD0.50/share (4.6% dividend yield) – consistent with OCBC’s 1H19 interim one-tier tax-exempt dividend of SGD0.25/share. See OCBC's share price; OCBC's dividend history.
Leng Seng Choon CFA
RHB Securities Research
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https://www.rhbinvest.com.sg/
2019-09-27
SGX Stock
Analyst Report
11.500
SAME
11.500
