Oversea-Chinese Banking Corp - RHB Invest 2019-11-05: Net Interest Income Up Marginally Q-o-q


Oversea-Chinese Banking Corp - Net Interest Income Up Marginally Q-o-q

  • Maintain NEUTRAL with unchanged GGM-derived Target Price of SGD11.50, 4% upside plus 4.5% 2019F yield, based on 1.08x 2020F P/BV.
  • Our long-term ROE assumption of 11.7% vs 9M19’s 11.6% is premised on wealth management gains offsetting NIM squeeze moving forward.
  • OCBC's 9M19 net profit rose 2% y-o-y to SGD3.63bn, representing 76% of our pre-results FY19 forecast, and is hence in line. This report is an update post analyst briefing.

3Q19 net profit fell 6% y-o-y and 4% q-o-q.

  • OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)'s 3Q19 net interest income rose 1%, despite NIM being 2bps narrower at 1.77%, the consequence of a lower interest rate environment and drop in average loan-to-deposit ratio. The sequential improvement in net interest income was due to asset growth. Net fee and commission income was up a respectable 6% q-o-q. See OCBC Announcements.

We lowered 2019F and 2020F earnings.

  • Factoring in 3Q19’s net profit decline of 4% q-o-q, and a slower economic environment, we lowered 2019 net profit by 3%.
  • We also cut our 2020 net profit forecast by 4%, with 2020F NIM narrowed by 4bps to 1.73%.

Management guided for 2020 NIM to be narrower.

  • OCBC's 3Q19 NIM of 1.77% was 2bps narrower q-o-q but 5bps wider y-o-y. The sequential reduction was due to the lower interest rate environment. We forecast 2019 NIM of 1.77%, same as 9M19’s 1.77%.
  • Management sees lower interest rates leading to narrower 2020 NIM – OCBC’s assumption is for one more federal funds rate (FFR) cut going forward.
  • We forecast 2020 NIM of 1.73%. Management guided for mild 2-3% loan growth for both 2019 and 2020, given the weak loan demand environment.

Wealth management remains steady.

  • OCBC's 3Q19 wealth management fees of SGD265m were up 11% y-o-y, although the q-o-q increase was a mild 1%. Bank of Singapore’s AUM stands at USD110bn, which is down marginally from 2Q19’s USD111bn. We believe wealth management offers growth potential ahead.

Higher 3Q19 provisions

  • The higher 3Q19 provisions were due to a number of factors, including Expected Credit Loss (ECL) refinement for OCBC NISP, impairment for two specific accounts, and Macro Economic Variable (MEV) changes affecting ECL. Management guided for 2020 credit cost of 22-25bps.
  • OCBC recorded CET1 CAR of 14.4%, which management is comfortable with. This could help in potential acquisitions. Management added that if OCBC is unable to proceed with acquisitions, then a 15% CET1 CAR would not be an efficient use of capital.

Target Price based on GGM-derived 1.08x 2020F P/BV.

  • 9M19’s ROE of 11.6% was lower than 9M18’s 12.3%. Our valuation for OCBC is based on long-term ROE assumption of 11.7%. This yields a 2020F target P/BV of 1.08x, which is 1SD below the 6-year average of 1.23x. See OCBC Share Price; OCBC Target Price.
  • We believe market expectations of possible M&A could keep OCBC's Share Price subdued, and hence we maintain NEUTRAL.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-05
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 11.500 SAME 11.500