• OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s 1Q19 net profit of S$1.23bn beat expectations. NIM rising 4bp to 1.76% and credit cost jumping 6bp to 38bp were key surprises.
• Loan growth was the weakest (+0.3%) but net trading income boosted the beat, forming 30% of non-interest income (vs. 10% in 1Q18).
• We project positive share price movement. Maintain HOLD for now with Target Price unchanged at S$12.00.

NIM Beat; Repricing Effect Bears Fruit; Deposits Down S$1bn Q-o-q

• OCBC’s net profit of S$1.23bn was 9% above our S$1.13bn and 6% above consensus S$1.16bn expectations. 1Q19 net profit formed 27%/26% of our/consensus full-year forecasts.
• 1Q19 NIM rose 4bp to 1.76% (4Q18: 1.72%, FY18: 1.70%). This was a major surprise as it guided for “further NIM expansion in FY19, although by less than the 5bp recorded in FY18”. Lagged repricing mechanism finally bears fruit. We believe the q-o-q drop of S$1bn in deposits against the flattish 0.34% loan growth could have helped. Accordingly, LDR rose slightly to 87.1% (4Q18: 86.4%). CASA stood at 46.8%.
• We believe that most of the NIM increase came from Singapore. NIM in OCBC Wing Hang was up 1bp q-o-q to 1.62%, NIM in Malaysia increased 5bp q-o-q to 2.09% but NIM at OCBC NISP dipped 16bp q-o-q to 3.89%.
• Loan growth was the weakest among the banks; we forecast 1.2% q-o-q. This may pose a challenge towards meeting its target of low-to mid-single-digit growth.

Best Trading Income Growth

• Non-II rose 38% q-o-q and 24% y-o-y, thanks to trading income (+205% y-o-y). In a buoyant market, OCBC posted the best trading income vs. peers. Net trading income formed 30% of non-II vs. 10% in 1Q18. Profit and premium income from insurance grew 12% q-o-q and 34% y-o-y. Wealth management climbed 15% q-o-q.
• Trading income increased as GEH’s profit from shareholder’s funds was significantly higher at S$124m in 1Q19 (1Q18: -S$1.3m) on the back of higher investment income and greater MTM gains.

Credit Cost Could Have Been a Conservative Approach

• New NPA formation fell 66% q-o-q to S$298m but credit costs came up to 38bp in 1Q19 (4Q18: 32bp), with S$249m in total impairment allowances. We had expected 1Q19 credit cost to be 15bp (FY18: 12bp). The increase in credit costs can be attributed to higher provisions made to existing NPLs in the OSV sector. The NPL ratio was stable at 1.5%.
• CTI came up to 40.9% in 1Q19 (FY18: 43.4%).
• CET-1 stood at 14.2% in 1Q19 (4Q18: 14.0%).
• ROE improved to 12% (4Q18: 9.0%, FY18: 11.5%).
• See attached PDF report for summary on quarterly result statistics.

Maintain HOLD and Target Price of S$12.00

• We forecast positive OCBC share price movement.
• Maintain HOLD for now with our GGM-based Target Price unchanged at S$12.00 (LTG: 2%, ROE: 11.2%).

Source: CGS-CIMB Research - 10 May 2019