Oversea-Chinese Banking Corp: Expect GEH Contributions to Support Performance January 16, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: 8.55
  • Expect OCBC to actively manage Loan to Deposit Ratio (LDR) lower.
  • Customers Loans would be affected by strengthening USD
  • OCBC’s insurance business would benefit from interest rate increases
  • Maintain “Neutral” with a higher target price of S$8.55 (previously S$8.25), pegged at unchanged 0.95x FY17F book value (excluding preference shares).

Weak net interest income growth as OCBC manages LDR lower.

We believe that OCBC will favour a defensive strategy by lowering its LDR amid a weak domestic economic outlook and a high private sector debt overhang. We forecast OCBC’s LDR to be c.80% in FY17F and as a result, we expect net interest income growth to be negative too. OCBC’s USD Customers Loans which makes up 23% of the total Customers Loans is vulnerable to the strengthening of USD. For further reading, we refer to our Singapore Banking Sector report titled “Challenges to loans and net interest income growth” which expounds our thesis.

OCBC’s insurance business could benefit from steady interest rate increases.

We expect Great Eastern Holdings (GEH) to score a straightforward win as interest rate rises. We estimate GEH contributes c.9% to Total Income. The rising bonds yields in line with higher interest rates will allow GEH to invest new premium income at higher yields and earn higher future returns that will contribute to more profits. We are not concerned of falling market value of existing bond holdings as interest rate rises because we expect insurers in general to hold their bonds till maturity.

Operating trends expected in 4Q16.

We expect 4Q16 PATMI to be S$951mn (+0.85% q-o-q, -0.94% y-o-y), supported primarily by lower provisions. We expect flattish q-o-q net interest income growth but better q-o-q contribution from life assurance business segment.

Investment Actions

We expect the better performance from non-interest income businesses especially contributions from life assurance and wealth management in FY2017F to support the weak net interest income. OCBC is less dependent on interest income compared to its peers. OCBC’s non-interest income makes up 44% of total income which is higher than DBS’ 38% and UOB’s 40%. Maintain “Neutral” with a higher target price of S$8.55 (previously S$8.25) as we roll over to FY17F valuation. Our new target price is based on unchanged 0.95x FY17F book value (excluding preference shares).

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About the author

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Jeremy Teong
Investment Analyst
Phillip Securities Research Pte Ltd

Jeremy covers primarily the Banking and Finance sector. He has 6 years’ experience in equities related dealing and research roles.

He graduated with Bachelors of Mechanical Engineering from Nanyang Technological University.

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