Oversea-Chinese Banking Corp (OCBC) - Phillip Securities 2019-11-06: Plagued By One-off Charges

OVERSEA-CHINESE BANKING CORP (SGX:O39) | SGinvestors.io OVERSEA-CHINESE BANKING CORP (SGX:O39)

Oversea-Chinese Banking Corp (OCBC) - Plagued By One-off Charges

  • OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)'s 3Q19 revenue/PATMI were within our expectations. However, if not for the lower tax rate of 10% for this quarter, earnings would have fallen short of our expectations. See OCBC Bank Announcements.
  • NII supported by 5bps y-o-y NIM expansion to 1.77% and 2% y-o-y loans growth.
  • Fees income rose 10% y-o-y to S$550mn, OCBC’s highest on record.
  • Insurance income fell 9% y-o-y due to fair value movements as a result of lower interest rates used to value insurance contract liabilities.
  • Allowances ballooned six times to S$323mn mainly due to ECL refinement for OCBC NISP, provisioning for two corporate accounts and ECL adjustment to account for MEV in the ECL model
  • NPL ratio rose to 1.6% mainly due to two corporate accounts (3Q18: 1.4%).
  • We maintain ACCUMULATE at a lower target price of S$11.70 (previously S$12.50). We roll forward our Gordon growth model to FY20 to arrive at our new Target Price of S$11.70.



The Positives


+ Decent NIM expansion of 5bps y-o-y to 1.77%

  • Decent NIM expansion of 5bps y-o-y to 1.77%, as assets yield rose 13bps y-o-y, outpacing the rise in funding costs of 10bps y-o-y. However, NIM fell by 2bps q-o-q, reflecting the lower interest rate environment in all the key markets and a lower LDR ratio of 86.8% (2Q19: 87.6%).
  • OCBC suggested NIM to contract around 5bps y-o-y in 2020 and expects one more rate cut in the next year. We forecast FY19e NIM at 1.76% and lowered our FY20e NIM by 2bps to 1.71%.

+ Fee income rose 10% y-o-y to S$550mn, OCBC’s highest on record.

  • Fee income was led by wealth management fee income from Bank of Singapore which hit S$265mn, highest on record. Bank of Singapore’s AUM expanded 5% y-o-y to US$110bn (S$152bn), underpinned by net new money inflows. We expect growth in AUM base to support a more stable and recurrent fees revenue stream in the future.


The Negatives


Allowances ballooned to S$323mn, of which S$144mn is a one-off ECL refinement for OCBC NISP to prepare for the adoption of IFRS 9 in 2020.

  • Multiple factors accounted for the remaining S$179mn surge in allowances. S$264mn of allowances was made for impaired loans (ECL Stage3) which were mainly due to two corporate accounts. Another S$48mn ECL (Stage 1&2) was taken in to account for Macro-Economic Variable (MEV) changes to reflect geopolitical events, slowdown in economy and uncertainties in Hong Kong. These allowances were offset by upgrades of S$44mn and ECL migration to stage 3 of S$87mn.
  • NPL ratio rose to 1.6% (3Q18: 1.4%) mainly due to the two corporate accounts in the OSV sector and transportation sector. OCBC guided FY19e credit costs to remain within 20-22 bps and FY20e credit costs to rise to 22-25bps. We forecast FY19e and FY20e credit costs at 20bps and 25bps respectively.

Insurance income fell 9% y-o-y.

  • The decline was due to fair value movements as a result of lower interest rates used to value insurance contract liabilities. Operationally, Great Eastern did well with NBEV margin up 15.4 p.p. to 51.3% (3Q18: 35.9%).


Investment Actions


We maintain ACCUMULATE at a lower target price of S$11.70 (previously S$12.50).

  • We roll forward our Gordon growth model to FY20e to arrive at our new Target Price of S$11.70. See OCBC Bank Share Price; OCBC Bank Target Price.
  • We revised our Target Price after taking into account the lower interest rate environment. Our FY20e NIM forecast was cut to 1.71% (-5bps y-o-y) and we lowered FY20e loans growth of 2% y-o-y (previously 3%) due to the slower economic environment and higher credit costs of 25bps for FY20e (previously 22 bps).
  • Management guided softer loan growth expectations of 2- 3% in FY20e (previously mid-single-digit), given the weak lending environment.





Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-11-06
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 11.70 DOWN 12.320



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