• 3Q17 PATMI of S$1,057mn missed our estimates by 10.6% because of weaker than expected profit from life assurance and other non-II
• NII increased 12% YoY on the back of strong loans growth and higher NIM
• WM fee income grew 32% YoY partly contributed by the inclusion of Barclay’s WM
• Net trading income weaker YoY and QoQ as volatility remains low.
• Upgrade to “Buy” from “Accumulate” with a higher TP of S$13.48 (previous TP S$11.95) based on Gordon Growth Model.

The Positives

+ Strong loans growth as global and domestic economic outlook improves. Loans grew 11% YoY beating analysts’ consensus and even management’s guidance for a mid-single digit loans growth. OCBC’s loans also outpaced Singapore domestic system loans growth in 3Q17. OCBC’s strong loans growth was mainly attributed to draw down of loans by Singapore based corporates expanding overseas for real estate related projects and other Hong Kong-based loans.

+ Stronger NII as LDR and NIM expanded. NII grew 14% as LDR expanded to 85.3% from 83.1% a year ago. NIM increased to 1.66%, 4 bps higher YoY as Singapore and Hong Kong benchmark rates rose sharply in 3Q17. Higher rates on interbank placements also supported the NIM expansion. 

+ NPL ratio stable as O&G sector stabilises. NPL ratio is stable at 1.26% for the past four quarters. New NPAs formation has been declining over the four quarters too. Management’s outlook is more sanguine as they see better utilisation of offshore O&G assets though charter rates and duration remain low. There were also no new names going into NPA and specific provisions were largely set aside for existing restructured loans.

The Negatives

– WM Income declined QoQ due to a lower number of blockbuster funds launched in 3Q17. WM income declined 6.1% QoQ to S$741mn but is still 18.2% higher YoY. 

– OCBC Wing Hang NIM declined to 1.57%, down 3bps from 2Q17. The fact was, within OCBC Wing Hang, Hong Kong and Macau operations registered higher NIM. But the consolidation of OCBC China into OCBC Wing Hang caused the NIM in aggregate to decline. The reason is treasury business is a large component of OCBC China’s operations and in 3Q17, the treasury business experienced some volatility.

– Net trading income continues to be weak. Similarly, universal banks and investment banks in the developed west have broadly reported weak trading income in the past 2 quarters citing the challenge of low market volatility globally. 

Outlook

OCBC’s guidance on loans growth has been revised upwards from mid-single digit percentage to high single-digit growth of 7% to 8% in FY18. But we pencilled in a more conservative loans growth number of 6% for FY18e. Therefore we expect NII to grow c.6% in FY18 too as long as a moderately strong economy is able to support the pass-through of higher interest rates. Other growth catalysts in FY18 will be the stronger real estate-related loans in Singapore as enbloc sales transactions start to flow into the market. And OCBC’s wealth management will benefit from the wealth effects of the enbloc sales as vendors from successful enbloc sales will likely engage wealth managers to manage their new found wealth.

Valuation: Gordon Growth Model

3-Year Historical Price-to-Book

Investment Actions

Upgrade to “Buy” from “Accumulate” with a higher TP of S$13.48 (previous TP S$11.95) based on Gordon Growth Model.