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3 Reasons To Pick OCBC Up Now And Not Later
Aspire, Hot Picks | 08 September 2015
Related stocks:
O39
By: Lim Si Jie
Articles (169) Profile

2Q15 Performance

1. 2Q15 Results: In-Line with Expectations

OCBC reported 2Q15 core net profit of $943 million (negative five percent QoQ, two percent YoY). This result, mainly driven by Net Interest Margin (NIM) improvement, better fee income and lower provisions, was in line with analysts’ consensus. Excluding the continued low provision levels (15 basis points (bps) annualised in 2Q15), it was a decent overall set of results for OCBC despite the spike in ASEAN Non-performing loans (NPLs).

In comparison to DBS and UOB, the result for OCBC was seen to be better balanced, helped by margin improvement (five bp QoQ), fee income (+11 percent) and continued benign credit cost (+16 bps QoQ).

2. Improvement In CET1

Fully loaded Common Equity Tier 1 Common Ratio (CET1) jumped from 10.7 percent to 11.2 percent in Q2. It was a 50 bps QoQ CET1 improvement in 2Q15, buoyed by its profit, Dividend Reinvestment Plan (DRP), and Risk-Weighted Average (RWA) rationalisation. Half of the improvement came from RWA reduction and the rest from capital accumulation.

RWA optimisation (in derivative and corporate books) was partly a driver of better capital ratios in 2Q15. OCBC’s Chief Financial Officer mentioned that Internal Ratings-Based (IRB) migration for NISP and Bank of Singapore is almost complete and awaits regulatory approvals.

With DBS and UOB holding about 12 percent CET1, OCBC continues to seek improvement in its CET1 to comparable levels, e.g. Wing Hang Bank moving into IRB approach and disposal of properties (The Wing Hang IRB migration will now probably be done only by 2018). These improvements should alleviate investors’ concerns over its lower-than-peers capital. Scrip dividends and high core returns should ensure continuity of this improvement.

Source: Deutsche Bank

3. Wing Hang Bank (WHB): Smooth Acquisition

OCBC is also progressing smoothly with its acquisition of Wing Hang Bank. The net profit progression is commendable for Wing Hang Bank, supported by solid revenue growth.

Management remains confident that the Wing Hang acquisition will be accretive by end-2017. Potential synergies from the WHB acquisition includes non-interest income as well as increasing its loan-to-deposit ratios.

Wing Hang Bank is seeing good momentum in the wealth management related businesses, with some flow through to Bank of Singapore as well. The small pick-up in NPLs was driven by the reclassification of some China SME NPLs.

2H15 Outlook

2Q15 Results Unsustainable

In Q2, core income improved with a pickup in NIMs and net interest income contributed around 4bps to the overall improvement of 9bps in return on assets. However, a key driver was the non-interest income which contributed 8 bps – half of this from fee income and rest from other non-interest income.

While improving fee income is generally a good thing, there might not be some element of sustainability in these numbers pertaining to the strong HK/China flow activity in Q2. Both stockbroking and wealth management benefitted from the strong HK/China flow activity. Around two thirds of the QoQ improvement in fee income came from stockbroking, fund management and wealth management which should have all benefitted from the exceptionally strong flow dynamics in north Asia. The rest of the non-interest income was driven by one-off items: the sale of the stake of Great Eastern Holdings (GEH) in New China Life.

NIMs To Maintain At Current Level

2Q15 NIMs were helped by loan repricing on the back of higher SIBOR and managing down surplus deposits. While NIMs improved for OCBC this quarter, little improvements are expected for 2H15. Management expects to maintain NIMs at current levels in 2H15, despite some downward pressure to ASEAN NIMs.

Challenging ASEAN Environment  

OCBC should expect to see a challenging environment in the near term, especially in the ASEAN book. The NPL pickup in Malaysia and Indonesia were mainly from single accounts related to the Oil & Gas segment. In overall the ASEAN book is likely to see some NPL pick-up, but the management does not them to be large. The commodities and Greater China book continues to hold up well.

The management remains cautious on the outlook on Malaysia and Indonesia onshore, with loan growth likely to remain muted. But the CEO is confident that offshore loan demand from Singapore will continue to remain strong.

Valuation

Pick Up On Perceived Weakness

With the Wing Hang Bank deal and rights completed, OCBC is now the best positioned among Singapore banks to pursue organic growth. The NIM benefit at OCBC from higher SIBOR rates also appears to be underappreciated as the bank’s Current Account Savings Account (CASA) base of 46 percent was built up during low rate environment (2006-12), and NIM improvement should start to improve from 2H15. The stock has weakened recently (-9 percent YTD) on a market perceived  as “weak 2Q” and having lack of near term drivers, which allows medium term investors to build position in a high-quality franchise at undemanding valuations.

Take a look at the other articles that SiJie had written on the other banks:

DBS6 Reasons Why DBS Is The Top Pick Among Banks

UOB: 2 Catalysts UOB is Lacking for Potential Upside

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Oversea-Chinese Banking Corp  11.010 +0.01 +0.09%   
Business: [FY18 Turnover] Global corporate/investment banking (35%), global consumer/private banking (34.8%), OCBC Wing Hang (11.5%), insurance (11%), global treasury & mkts (7.7%).

Insight: May-19, 1Q19 total income rose 14.7% driven by str... Read More


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