OVERSEA-CHINESE BANKING CORP (SGX:O39)
OCBC Bank 3Q19 Results Preview - Moderation In Loan Growth; Uptick In Credit Cost
- We expect loan growth to moderate to 3.2% y-o-y and credit cost to rise to 22bp (due to higher general provisions) in 3Q19 in light of the clouded and uncertain outlook for Singapore and regional economies.
- We forecast OCBC's net profit of S$1,132m for 3Q19, down 9.1% y-o-y and 7.5% q-o-q.
- Valuation is attractive at 1.0x 2019F P/B and dividend yield at 4.6%.
- Maintain BUY. Target price: S$14.45.
WHAT’S NEW
Uncertain macro outlook takes its toll on loan growth.
- We expect OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s loan growth to decelerate to low-single-digit for 2019 (management’s previous guidance at mid-single-digit). We estimate loan growth at 0.8% for 3Q19 and 3.6% for the year.
- OCBC continues to support customers’ expansion overseas to acquire commercial buildings, hospitality properties, student accommodation and data centres. There was also disbursement of residential mortgages approved earlier in 1H19.
Slight NIM compression.
- We expect NIM to recede marginally by 1bp q-o-q to 1.78%. The 3- month SIBOR and SOR have held up fairly well at 1.88% (3Q19: -12bp) and 1.68% (3Q19: - 15bp) respectively as at end-Sep 19 despite two rate cuts of a total 50bp from the Fed.
- OCBC has cut interest rates for fixed deposits in Singapore from 1.7% to 1.55%. However, there is pressure on loan yield, especially in regional countries, such as Indonesia, due to lower policy interest rates.
Wealth management stays resilient.
- We expect wealth management fees to be stable at S$240m with continued growth in AUM offset by poor market sentiment caused by concerns over a global economic slowdown and uncertain outlook in the trade negotiations between the US and China. We expect loan and trade-related fees to be flat y-o-y.
- Overall, we expect net fees & commission at S$502m, down 3.9% q-o-q.
A normalised quarter for Great Eastern.
- We expect the insurance business to contribute income of S$205m (life insurance: S$165m, general insurance: S$40m). We do not expect mark-to-market gains or losses to be significant as gains from the bond market are likely to be offset by losses from the equity market.
- We expect net trading income to normalise to S$120m in 3Q19.
Operating expense remains tightly controlled.
- We expect operating expense to increase 2.5% y-o-y in 3Q19. We expect cost-to-income ratio to remain healthy at 43.5%, well within management guidance of 40-45%.
Uncertain macro outlook leads to higher general provisions.
- The government has cut its forecast for 2019 GDP growth from 1.5-2.5% to 0-1.0% due to a decline in manufacturing output. The dismal macro outlook is expected to translate into higher general provision (stage 1 and stage 2 expect credit losses under IFRS9). We expect credit cost at 22bp in 3Q19.
- We have factored in NPL formation at 53bp (similar to 3Q18’s) and expect NPL ratio to rise marginally by 1bp to 1.48%.
STOCK IMPACT
Moderation in non-interest income.
- We forecast net profit of S$1,132m for 3Q19, down 9.1% y-o-y and 7.5% q-o-q. The y-o-y drop is due to higher credit cost in 3Q19 (more general provisions). The q-o-q reduction is due to moderation in non-interest income and higher credit cost.
Weathering the slowdown in Hong Kong.
- Hong Kong dollar loans accounted for S$35.3b or 13.4% of OCBC’s total loans. They are predominantly residential mortgages and loans to real estate developers. Exposure to the troubled retail and hospitality sectors is small. NPL ratio for OCBC Wing Hang is low at 0.3%.
EARNINGS REVISION/RISK
- We reduce our 2019-20 net profit forecasts by 2.7% and 5.0% respectively due to higher credit coss, which reflects a more subdued and uncertain outlook for Singapore and regional economies.
VALUATION/RECOMMENDATION
Maintain BUY.
- Our target price of S$14.45 is based on 1.40x 2019F P/B, derived from the Gordon Growth Model (ROE: 11.0%, COE: 8.00% (Beta: 1.1x) and Growth: 0.5%). See OCBC share price.
- Valuation is attractive at 1.0x 2019F P/B and dividend yield at 4.6%. See OCBC dividend history.
SHARE PRICE CATALYST
- Expansion in China’s Greater Bay Area.
- Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2019-10-17
SGX Stock
Analyst Report
14.45
DOWN
14.480
