Singapore market was weak yesterday with the STI falling 1.3% to finish at 3,001.51. OCBC was the second biggest laggard among the index constituents, pulling back 1.3% to finish at $9.08. The bank had reported its quarterly earnings just two days ago on 28 October. Here is what Macquarie Equities Research (MER) has to say about OCBC and its recent results.
 
Here are some excerpts from the report.
 
Key points and conclusion – (i) 4% earnings beat from strong banking operations (ii) margins flat and improved volume growth trends (iii) stronger than expected new NPL formation. MER sees the P&L momentum as a positive for OCBC but they remain very watchful on asset quality trends. OCBC’s NPL ratio remains low (0.9%) but new NPL formation was much stronger this quarter than expected by MER.
 
Impact
Earnings beat – In 3Q15, OCBC reported adjusted net profit of S$902m (7% YoY, -4% QoQ), which compares to MER’s estimate of S$865m, and consensus estimates of S$900m. Strong income from the banking operations (including a surprisingly strong trading result) offset lower insurance income. Cost growth was lower than expected while loan loss provisions were slightly above MER’s expectations.
 
Margins flat and improved volume growth trends – In 3Q15, Net Interest Margin (NIM) was relatively flat at 1.66% (-0.02% YoY, -0.01% QoQ). The repricing of asset yields from higher short-term rates during the quarter will be more visible only in 4Q15 MER believes. Loans grew 4% YoY and 1% QoQ, mainly driven by building and construction loans which was better than expected by MER.
 
Asset quality weakened but and capital ratios up – In MER’s recent research report ‘Fighting the Markets’ MER said that asset quality trends are a key investment criteria. New Non Performing Loan (NPL) formation for OCBC was much higher than expected by MER. Driven by new NPL formation in the Oil & Gas sector, NPL volumes increased by S$400m QoQ to S$1.86bn while MER expected NPLs of S$1.55bn. The NPL ratio went up to 0.9% from 0.7% a quarter ago and NPA coverage declined to 121% from 153% in 2Q15. On the positive side, the Common Equity Tier 1 (Basel 3) ratio keeps increasing and stands at 11.4% (+0.2% QoQ).
 
Earnings and target price revision

• No change.

 
Price catalyst

• 12-month price target: S$10.00 based on a Price to Book methodology.
• Catalyst: asset quality trends.

 
 
Action and recommendation
MER has an Outperform rating on OCBC – target price S$10.00.
 
MER is a buyer of OCBC based on their belief in (i) OCBC’s strong position to benefit from the Asia Wealth Management theme, (ii) mid-term benefits from investments into product capabilities and investments into Singapore IT and Digital Banking and (iii) possibility to reduce the stake in Great Eastern on a 3- 5 year view, MER thinks.
 

Source: Macquarie Research - 30 Oct 2015