• 2Q19 revenue/PATMI was in line with our estimates.
• Strong NIM expansion of 12bps YoY and 3bps QoQ to 1.79%, due to a catch-up in loan repricing and better utilisation of deposits.
• Wealth management fees surged 17% YoY to $262mn, its highest level in five quarters.
• Life insurance profit from GEH fell 26% YoY due to decline in discount rate used to value long-term insurance contract liabilities.
• Credit costs normalised to 15bps after higher provision was taken in 1Q for the OSV sector. NPL ratio remained stable at 1.5% (2Q18: 1.4%).
• Declared interim dividend of 25 cents/share, 25% higher than a year ago.
• We maintain ACCUMULATE at a lower target price of S$12.50 (previously S$12.70). Our TP is based on target price-to-book of 1.3x, derived from the Gordon Growth model. We toned down terminal growth from 2.5% to 2.0%.

The Positives

+ Strong NIM expansion of 12bps YoY to 1.79%. OCBC continues to catch up in loan repricing after several quarters of prudent pricing in 2018 but NIM was softened by tepid loan growth of 4% YoY. Better utilisation of deposits seen from rise in LDR from 85.9% a year ago to 87.6%, helped margins. Asset yield rose 34bps YoY (1Q19: +50bps), while the rise in cost of funds was lower at 26bps YoY (1Q19: 44bps) with the release of pricier deposits. OCBC guides 3Q NIM to rise at a lower magnitude of 1bps and 4Q NIM to be flat depending on the interest rate actions of other central banks. We maintain our FY19e NIM forecast of 1.74%.

+ Wealth management fees rebounded 17% YoY to $262mn, its highest level in five quarters. Bank of Singapore’s AUM expanded 9% YoY and climbed to a new high of US$111bn (S$151bn), underpinned by net new money inflows. We expect growth in AUM base to support a more stable and recurrent fees revenue stream in the future.

+ 25% higher interim dividend of 25 cents per share. The interim dividend payout will amount to approximately S$1.08 billion, representing 44% of the Group’s 1H19 net profit after tax. CET1 ratio rose strongly to 14.4% (2Q18: 13.2%) which provides flexibility to pursue market expansion opportunities as they arise and weather trade uncertainties. OCBC maintains its 40-50% payout ratio guidance for the full year. We forecast FY19e DPS of $0.49.

The Negatives

– New NPL formation rose by $390mn or 11% YoY. The rise was primarily from Indonesia’s Crude Palm Oil (CPO) loan portfolio which required some restructuring due to the fall in palm oil prices. The restructured loans resulted in a rise in NPL. Around 2% of OCBC’s loan book is exposed to the CPO sector. However, asset quality remained stable with NPL ratio relatively unchanged at 1.5% (2Q18: 1.4%). We forecast FY19e credit cost at 20bps.

– Life and insurance business contribution fell 26% YoY, due to a decline in discount rate used to value long-term insurance contract liabilities, offset by better investment performance. Operationally, Great Eastern did well with NBEV margin up 4.4 p.p. to 49.3%. TWNS was down 9% YoY due to reduced single premium product sales.

Investment Actions

We maintain ACCUMULATE at a lower target price of S$12.50 (previously S$12.70).  Our TP is based on target price-to-book of 1.3x, derived from the Gordon Growth model (long term ROE assumption: 11.3%, COE: 9.4% (Beta: 1.2x), Growth: 2.0%). We toned down terminal growth from 2.5% to 2.0%. We forecast FY19 DPS of $0.49, giving a 4.4% dividend yield support.

OCBC’s robust CET1 of 14.4% will provide shelter the bank from trade war uncertainties and slowing global growth. Surplus capital also provides opportunity for inorganic growth. Heavier reliance on interest income and recurrent fees should provide stability and predictability to revenue and offset some of the impact from interest rate cuts.