• 4Q16 PATMI of SGD789mn missed our 4Q16 estimate of SGD951mn by 17%.
• Surprise came from poorer performance by the life assurance business and higher-than-expected provisions in 4Q16. But a flat 4Q16 net interest income q-o-q growth was in line with our expectations.
• Downgrade to “REDUCE” with a lower target price of S$8.48 (previously S$8.55), based at unchanged 0.95x FY17F book value (excluding preference shares).

• Loans growth boosted by acquisition of Barclays Wealth Management business in Hong Kong and Singapore. OCBC’s customers loans (net of allowance) increased 4.3% year-on-year (“y-o-y”) as OCBC completed the acquisition of Barclays Wealth business in Hong Kong and Singapore in Nov 2016. Excluding the acquisition, loans growth would be c.3%. The increase in loans was led by Housing loans, Professional and individuals loans and Financial institutions, investment and holding companies loans.

• 4Q16 Net interest income declined 7% y-o-y to SGD1.25bn. The average rate on non-bank customers loans declined 16bps y-o-y, offsetting an increase in loans volume (net of allowance) growth of 4.3%. On quarter-on-quarter (“q-o-q”), the average rate on non-bank customers loans also declined 6bps despite a rise in SOR and SIBOR in mid-November 2016. We believe that the disconnection between the bank’s lending rates and the benchmark rates in 4Q16 could be partly due a competition for high quality loans amid mounting pressures from souring loans. We expect stiffer competition for quality loans to continue, adding more pressure on net interest income growth.

• NPLs rose SGD814mn, or 33bps, y-o-y.  About 60% (SGD488mn) of the increase was contributed by Offshore Oil & Gas sector. New NPLs from this sector may continue to rise in coming quarters owing to unfavourable charter rates that are on long term contracts. Exposure to Oil & Gas offshore support vessels loans as of 4Q16 is SGD5.2bn (2.34% of total customer loans). Of that exposure, SGD1.15bn is classified as NPL (SGD922mn in 3Q16). Total Cumulative Allowances coverage ratio worsened to 100.0% of total Non-performing Assets compared to 3Q16’s 101.1%.

• Non-interest Income declined 4% y-o-y. Fee and commission income was up 4% y-o-y, supported by Fund Management (up 14% y-o-y) and Wealth Management (up 13% y-o-y). But offset by a 39% decline in profit from Life assurance owing to poor performances in its Non-participating Fund.

Investment Actions

In 2017, we continue to expect unfavourable loans volume and rates dynamics to suppress net interest income growth. We observed that OCBC’s Great Eastern Holdings performance had been volatile in 2016 and had failed to offset weaknesses in the loans business. However we expect higher interest rates in 2017 to boost OCBC’s insurance business performance and provide some respite to an otherwise tough operating environment. Downgrade to “REDUCE” with a lower target price of S$8.48 (previously S$8.55). Our revised TP is based on unchanged 0.95x FY17F book value (excluding preference shares).