Oversea-Chinese Banking Corp (OCBC) - Phillip Securities 2019-12-16: Reaping From The Rise Of Asian Empires

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

Oversea-Chinese Banking Corp (OCBC) - Reaping From The Rise Of Asian Empires

  • Continuous investments in wealth management initiatives to support earnings visibility while cushioning the impact from lower NIM.
  • OCBC has the highest CET 1 % as of 3Q19 at 14.4% as compared to 13.8%/13.7% for DBS and UOB and is likely to edge into capital inefficiency territory if unutilised.
  • OCBC offers a dividend yield of around 4.5%, which cushions the stock’s downsides.
  • FY20 NIM to contract around 5bps due to falling interest rate environment.
  • Maintain ACCUMULATE with an unchanged target price of S$11.70.



OCBC - Company Background



OCBC - 2020 Investment Merits/ Outlook


A bright spot in wealth management.

  • Continuous investments in wealth management initiatives to support earnings visibility while cushioning the impact from lower NIM. Wealth management income for 9MFY19 rose 10% to a record S$2.46bn, up from S$2.24bn a year ago. In addition, 31% of OCBC’s 9M19 total income stemmed from its wealth management franchise as compared to 30% a year ago.
  • We expect the momentum to be sustained by higher activities from investors as well as organic AUM growth.

Well capitalised.

  • OCBC has the highest CET 1 % as of 3Q19 at 14.4% as compared to 13.8%/13.7% for DBS (SGX:D05) and UOB (SGX:U11), and is likely to edge into capital inefficiency territory if unutilised.
  • Management suggested that excess capital could be used for acquisitions or offensive purposes. However, if utilised for such purposes, OCBC could be facing potential acquisition risks. We forecast FY19e/FY20e dividend yield at 4.3% and 4.5%.

Pressure on margins.

  • With the cuts in interest rates, OCBC suggested NIM to contract around 5bps y-o-y in 2020 and expects one more rate cut in the next year. However, the impact of Fed rate cuts could be cushioned with adjustments to funding costs to match the pricing charged on loans. We forecast FY19e/FY20e NIM at 1.76% and 1.71%.

Potential rise in credit costs.

  • The new Expected Credit Loss (ECL) model requires banks to make adequate provisions whenever there is deterioration in the macro-environment. Hong Kong has been hit badly by the six months of violent anti-government protests and the U.S.-China trade tension. We expect credit costs to be slightly elevated next year as the risk of slower global growth and sustained domestic unrest in Hong Kong leads to higher ECL.

Flat loans growth.

  • OCBC guided softer loan growth expectations of 2-3% in FY20e (previously mid-single-digit), given the weak lending environment. We forecast FY20e loans to grow 2.4% y-o-y.


Recommendation






Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-12-16
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 11.700 SAME 11.700



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