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Simons Trading Research

Author: simonsg   |   Latest post: Wed, 14 Aug 2019, 9:56 PM

 

Oversea-Chinese Banking Corporation (OCBC) - 1Q19 Results Preview ~ Mark-to-market Losses Reverse Into Gains, Lower Credit Cost

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  • Net profit is expected to rebound 21% q-o-q in 1Q19 due to NIM expansion, recovery in wealth management fees and net trading income, and lower credit cost.
  • Mark-to-market losses for Great Eastern Holdings’s shareholders’ fund are likely to reverse into gains. Credit cost is expected to fall within management’s guidance of 12-15bp as the outlook improves.
  • We expect OCBC to gradually ratchet up its dividend payout, supported by its high CET-1 CAR of 14%.
  • Maintain BUY. Target price: S$14.12.

What’s New

On track to achieve mid-single-digit loan growth for 2019.

  • We expect OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s to report loan growth of 1% q-o-q and 5.5% y-o-y in 1Q19, driven by the corporate and commercial segments, augmented by trade loans and residential mortgages.
  • OCBC also supports customers investing in hospitality, commercial real estate, student accommodation and data centres overseas.

Gradual sequential uptick in NIM.

  • OCBC raised its mortgage board rate by 55bp effective Jan 19. The upside from higher mortgage rates is partially offset by pressure from higher fixed deposit interest rates. We expect NIM expansion of 1bp q-o-q and 6bp y-o-y to 1.73% in 1Q19.
  • Management guided continued NIM expansion in 2019, albeit smaller than the 5bp last year.

Some recovery towards risk-on mode.

  • We expect a 9% q-o-q rebound in wealth management fees due to buoyant equity markets and increased market activities, coupled with steady growth in AUM. However, wealth management fees should have declined 12% y-o-y due to a high base created by blockbuster launch of bespoke funds in 1Q18.
  • Overall, we expect fees to rebound 7.6% q-o-q but recede 4.8% y-o-y.

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 have witnessed a U-turn in the Singapore stock market. The FSSTI lost 188pts in 4Q18 (down 5.8%) but reversed to a gain of 144pt in 1Q19 (up 4.7%). Likewise, the widening of credit spreads for corporate bonds in 4Q18 is likely to have reversed in 1Q19.
  • We expect mark-to-market losses from shareholders’ fund suffered by Great Eastern Holdings (SGX:G07) in 4Q18, which affected OCBC’s net trading income, to reverse into gains in 1Q19. We expect net trading income to recover back to a normalised level of S$100m in 1Q19.

Operating expense remains tightly controlled.

  • We expect cost-to-income ratio to improve 3.0ppt q-o-q to 43.2%, well within management guidance of 40-45%.

Asset quality remains stable.

  • Management does not see signs of systemic weakness or deterioration. While management does not foresee a quick recovery in the oil & gas sector, vulnerable accounts have already been recognised as NPLs and adequate provisions were made. We expect NPL ratio to remain stable.
  • Credit cost is expected at 15bp, in line with management guidance of 12-15bp.

Stock Impact

NIM expansion has resumed.

  • We forecast net profit of S$1,121m for 1Q19, up 21% q-o-q but flat y-o-y. The sequential rebound will largely be driven by NIM expansion of 1bp q-o-q and normalisation in contributions from wealth management and net trading income.
  • 4Q18 was a low base due to high credit cost of 32bp (higher NPLs for a trading company in Hong Kong and an oil & gas company in Malaysia). Conversely, 1Q18 was a high base due to muted credit cost of only 2bp.

Divesting non-core assets should the opportunity arise.

  • According to The Business Times, OCBC intends to divest the 22-storey freehold serviced residence with GFA of 104,377sf at 2 Mount Elizabeth Link. See report. The property is located near the upcoming Orchard Station for the Thomson-East Coast Line. OCBC has appointed Cushman & Wakefield as the exclusive marketing agent to find a buyer.
  • The property is estimated to be worth at least S$261m but carried on OCBC’s books at only S$19.3m.

Earnings Revision / Risk

  • We keep our 2019 net profit forecast largely unchanged.

Valuation / Recommendation

  • Maintain BUY. Our target price of S$14.12 is based on 1.39x 2019F P/B, derived from the Gordon Growth Model (ROE: 10.9%, COE: 8.25% (beta: 1.1x), growth: 1.0%).

Share Price Catalyst

  • We estimate that the implementation of internal ratings-based approach (IRBA) at OCBC Wing Hang would improve OCBC’s CET-1 CAR by 0.6ppt. The exercise is expected to be complete in 2019-20.
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.

Source: UOB Kay Hian Research - 24 Apr 2019

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Labels: OCBC Bank

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