Oversea-Chinese Banking Corp Ltd – NIM resurgence dampened by OSV allowances May 13, 2019

PSR Recommendation: ACCUMULATE Status: Downgraded
Last Close Price: S$11 Target Price: S$12.68

The Positives

+ NIM expanded 9bps YoY and 4bps QoQ to 1.76%, driven by higher interest rates. After a year of compressed NIM, OCBC finally showcased a significant NIM expansion of 9bps due to two aspects. Firstly, there was better utilisation of deposits as seen from the rise in LDR from 84.4% in 1Q18 to 87.1% and better management of costs by letting the pricier fixed deposits (which OCBC has been shoring up in 4Q18) lapse.

Secondly, OCBC caught up in the repricing game after several quarters of prudent loan pricing which was meant to provide their customers with stability in instalments. Asset yield rose 50bps YoY (4Q18: 53bps) as interest rates rose, while the cost of fund rose 44bps YoY (4Q18: 50bps) with the release of pricier deposits. 

Given a more dovish outlook on interest rates, we expect a lower magnitude of NIM expansion of 1-2bps in the next few quarters. Hence we forecast a 5bps increase in NIM for FY19e at 1.75% (Figure 1).

 

+ Non-interest income rose 24.5% YoY, more than offset the contraction in fee income of -7.6% YoY. Trading income was the standout performer, rising to S$285mn from S$94mn a year ago, due to higher flows in recovering financial markets. Profit from life assurance recovered from a quarterly average of S$185mn to S$233mn due to favourable financial markets.

 

The Negatives

– Allowances spiked to S$249mn from an unusual low of S$12mn in 1Q18. OCBC reassessed its OSV portfolio and took in additional provisions by substantially reducing the collateral valuations further to scrap value. The unrealised assumptions of recovery in oil drilling activities and higher availability in other sources such as renewable energy resulted in amendments to OCBC’s ECL model. Unemployed vessels require high reactivation costs before going back on the market, and these vessels’ current outfit of technology may not meet the latest market requirements of operating regulations, requiring further upgrading costs.

 

However, portfolio quality remains sound, with new NPL formation at a low of S$298mn as compared to S$297mn in 1Q18 and S$881mn in 4Q18. There is no new NPL formation for the OSV sector. The additional provisions iterated above relate to vessels that are already in NPL. NPL ratio remained stable at 1.5% (1Q18: 1.4%).

Due to the additional provisioning this quarter, the credit cost guidance was revised upwards by 7bps to 19-22bps. We increase our credit cost forecast for FY19e from 14 bps to 22bps (Figure 1).

 

– Housing loans contracted YoY for the first time in more than a decade at -1.3%. We believe that similar to its peers, OCBC’s mortgage loan business faced stiff competition for refinancing and lower volume of new bookings. Property launches are seasonally weaker in the first half of the year, and more customers should re-enter the market as en-bloc funds kick in this year. Hence, we expect mortgage loan growth to stabilise in 2H19, and we maintain our FY19e loan growth estimate of 4.4%, in line with the mid-single-digit guidance (Figure 1). Housing loans made up 24.6% of total loans.

 

Investment Actions

We downgrade to ACCUMULATE at a lower target price of S$12.70 (previously S$13.70).  The lower target price was due to our increase in credit cost forecast for FY19e from 14 bps to 22bps. Expect NIM improvement to continue due to the repricing of loans at a sustainable pace of 1-2bps each quarter. OCBC’s loan growth was the weakest among the three banks. The returning trade war jitters, property cooling measures and rising interest rates may be obstacles in achieving a low mid-single-digit loan growth. Any further upside will depend on capital markets improving for investment and wealth management business turn around. Heavier reliance on interest income should provide stability and predictability to revenue.

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About the author

Profile photo of Tin Min Ying

Tin Min Ying
Research Analyst
Phillip Securities Research Pte Ltd

Min Ying covers the Banking and Finance sectors. She has experience in external audit and corporate tax roles.

She graduated with a Bachelor of Accountancy with a major in Finance from SMU.

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