OVERSEA-CHINESE BANKING CORP (O39) SGD 10.94

Average Div Price: $11.22

Maybank KE Retail Research( Monday 7 May)

OCBC's 1Q18 net profit of $1.11b (+29% y/y, +8% q/q) came in at low end of estimates. Growth was supported by a significant drop in loan provisions.

Net interest income grew 11% to $1.42b on loan expansion of 10%, mainly stemming from financial institutions (+25.2%), general commerce (+14.5%) and housing loans (+8.4%).

But its net interest margin (NIM) of 1.67% (+5bps, flat q/q) was disappointing especially after both DBS (1.83%) and UOB (1.84%) reported better NIMs amid rising SGD and USD rates and suggests that OCBC has a higher portion of low yielding trade loans and higher cost of funding.

Non-interest income climbed to $918m (+8% y/y, -24% q/q) as fee income of $536m (+11% y/y, +9% q/q) was boosted by wealth management of $255m (+19% y/y, +18% q/q) and insurance profit of $206m (+248% y/y, -33.5%). This was eroded by lower net trading income of $94m (-41% y/y, -5% q/q) and investment gains of $8m (-87% y/y, -97% q/q).

Notably, private banking unit Bank of Singapore's AUM swelled 19% to $133b. As a proportion of total income, overall wealth management income, including insurance, contributed 31%, up from 28% a year ago.

Operating expenses rose at a slower rate of 6% to $1.03b, largely driven by a rise in staff costs. Cost-to-income ratio thus fell from 45.9% to 44.2%, as a result of strong income growth and effective cost management.

Loan allowances plunged 93% to just $12m as the prior periods included allowances set aside for bad accounts in the offshore support services and vessels sector. NPL ratio remained resilient at 1.4% (1Q17: 1.3%, 4Q17: 1.5%).

CET1 capital position was stable at 13.1% (4Q17: 13.1%), but this is below that of DBS (14%) and UOB (14.9%). Annualised ROE also improved to 11.8% from 9.6% in 1Q17.

While business sentiments have turned positive, the bank remains vigilant to geopolitical events, including increased global trade tensions and the effects of higher interest rates on investment activities, and expects higher loan provisions in the coming quarters.

At current level, OCBC trades at about 1.48x P/B, between UOB of 1.39x and DBS of 1.52x.

Maybank KE has a Buy with TP of $14.83

23 May 18 BUY @ $12.30 Next DVD 18Cents in August

A lot of buyback recently, probably worth studying.

T: $8.50 D: $360 (semi annual)


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