• 3Q19 revenue/PATMI were within our expectations. However, if not for the lower tax rate of 10% for this quarter, earnings would have fallen short of our expectations.
• NII supported by 5bps YoY NIM expansion to 1.77% and 2% YoY loans growth.
• Fees income rose 10% YoY to S$550mn, OCBC’s highest on record.
• Insurance income fell 9% YoY due to fair value movements as a result of lower interest rates used to value insurance contract liabilities.
• Allowances ballooned six times to S$323mn mainly due to ECL refinement for OCBC NISP, provisioning for two corporate accounts and ECL adjustment to account for MEV in the ECL model
• NPL ratio rose to 1.6% mainly due to two corporate accounts (3Q18: 1.4%).  
• We maintain ACCUMULATE at a lower target price of S$11.70 (previously S$12.50). We roll forward our Gordon growth model to FY20 to arrive at our new TP of S$11.70.

The Positives

+ Decent NIM expansion of 5bps YoY to 1.77%, as assets yield rose 13bps YoY, outpacing the rise in funding costs of 10bps YoY. However, NIM fell by 2bps QoQ, reflecting the lower interest rate environment in all the key markets and a lower LDR ratio of 86.8% (2Q19: 87.6%). OCBC suggested NIM to contract around 5bps YoY in 2020 and expects one more rate cut in the next year. We forecast FY19e NIM at 1.76% and lowered our FY20e NIM by 2bps to 1.71%.

+ Fee income rose 10% YoY to S$550mn, OCBC’s highest on record. Fee income was led by wealth management fee income from Bank of Singapore which hit S$265mn, highest on record. Bank of Singapore’s AUM expanded 5% YoY to US$110bn (S$152bn), 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.

The Negatives

– Allowances ballooned to S$323mn, of which S$144mn is a one-off ECL refinement for OCBC NISP to prepare for the adoption of IFRS 9 in 2020. Multiple factors accounted for the remaining S$179mn surge in allowances. S$264mn of allowances was made for impaired loans (ECL Stage 3) which were mainly due to two corporate accounts. Another S$48mn ECL (Stage 1 & 2) was taken in to account for Macro-Economic Variable (MEV) changes to reflect geopolitical events, slowdown in economy and uncertainties in Hong Kong. These allowances were offset by upgrades of S$44mn and ECL migration to stage 3 of S$87mn. NPL ratio rose to 1.6% (3Q18: 1.4%) mainly due to the two corporate accounts in the OSV sector and transportation sector. OCBC guided FY19e credit costs to remain within 20-22 bps and FY20e credit costs to rise to 22-25bps. We forecast FY19e and FY20e credit costs at 20bps and 25bps respectively.

– Insurance income fell 9% YoY. The decline was due to fair value movements as a result of lower interest rates used to value insurance contract liabilities. Operationally, Great Eastern did well with NBEV margin up 15.4 p.p. to 51.3% (3Q18: 35.9%).

Investment Actions

We maintain ACCUMULATE at a lower target price of S$11.70 (previously S$12.50).  We roll forward our Gordon growth model to FY20e to arrive at our new TP of S$11.70.

We revised our TP after taking into account the lower interest rate environment. Our FY20e NIM forecast was cut to 1.71% (-5bps YoY) and we lowered FY20e loans growth of 2% YoY (previously 3%) due to the slower economic environment and higher credit costs of 25bps for FY20e (previously 22 bps). Management guided softer loan growth expectations of 2-3% in FY20e (previously mid-single-digit), given the weak lending environment.