• A decline in funding costs on OCBC (SGX:O39)’s expectations of 3 Fed rate cuts in FY19 should support a 9bp y-o-y rise in NIMs. We hike FY19-21F NIMs by 3-4bp.
• Wealth management could be OCBC’s key lever to support income growth in the medium term. We adjust FY19-21F EPS to reflect market-income growth.
• Maintain HOLD with slightly lower GGM-based Target Price of S$12.53. 
• Dividend payout ratio is maintained at 40-50%. We raise our FY19 expectations to S$0.50/share.

Results Highlights – Continued NIM Expansion, Weaker Insurance

• OCBC’s 2Q19 net profit of S$1.22bn was slightly above our S$1.2bn estimate, and 5% above Bloomberg consensus’ S$1.16bn expectation. 1H19 net profit formed 51% of our full-year estimate. Total income dipped 2% q-o-q (+6% y-o-y) from a high base in 1Q19 – lower credit costs of 17bp (1Q19: 39bp) had offset the weaker insurance and trading income in 2Q19.
• The strength in wealth management fees was the key surprise; Bank of Singapore’s (BOS) AUM rose 3% q-o-q to US$111bn in 2Q19.

Briefing Highlights – Effects of Fed Rate Cuts From FY20 Onwards

• OCBC expects two additional Fed rate cuts this year (3 total in FY19), but believes the effects will only be felt from FY20 onwards. The bank holds out for a slight q-o-q increase in 3Q19 NIMs and for any subsequent change in margins to depend on market interest rates.
• Drivers for asset yield growth are likely to stem from its overseas operations (58% of loan book). OCBC’s margins could also benefit from a reduction of funding costs as interest rates fall (in line with rate cuts) given its 44% FD proportion.
• We raise FY19 NIM estimate to 1.79% (+4bp y-o-y) and FY20-21F to 1.78% (+3bp y-o-y) to incorporate the 1H19 performance and our interest rate expectations.
• Upside/downside risks are a neutralisation of US-China trade tensions/sharper-than-expected Fed rate cuts.

Wealth Management Franchise Could be Key to Earnings Growth

• With subdued loan growth given the current macroeconomic conditions and more volatile insurance income due to Great Eastern (SGX:G07)’s larger product mix of investment-linked products, wealth management income could be the key driver of earnings growth in the medium term.
• We continue to expect a modest +3.5% y-o-y loan growth in FY19. Amid weak Singapore GDP growth, management expects marginal loan expansion from HK.
• 2Q19 saw some normalcy in housing loan pricing; stronger bookings seen in 2Q19 could translate into a reversal of the mortgage decline seen in 1H19. The 3% q-o-q rise in BOS’s AUMs were broad-based from SEA, Greater China and includes Europe. We believe that prolonged uncertainty in HK could see more net money inflows into OCBC.

We Raise Our Credit Cost Assumptions on Further Provisioning Risks

• The S$134m uptick in Indonesian NPLs were attributable to customers operating in the palm oil sector. These exposures have been restructured, but do not require significant provisions due to high collaterisation. OCBC bank’s exposure to a state-owned steel manufacturer is being worked out. We raise our credit cost assumptions to 22bp in FY19.

Source: CGS-CIMB Research - 3 Aug 2019