Outlook
Not taking a "worst is not over" view. Contrary to peers,OCBC remains cautious on the outlook for the oil & gassector. lssues pertaining to asset quality for the oil & gashave been dealt with, and sufficient provisions are said tohave been made. Assessment of collateral is done on aquarterly basis and additional specific provisions have beenmade largely to address deteriorating collateral values.
We understand that market prices for vessels have approximatelyfallen by 40-45% from the original values. According to management, OCBC has taken an additional 20-25%haircut on these already stressed values.
Management appears to have addressed the oil & gas issues pre-emptively,judging by the quantum of specific provisions made from asearly as 3Q15.The view taken that the worst is not over theoil & gas sector is drawn from management's opinion that itis not expecting a broad- based recovery and that oil pricesremain volatile, hence oil majors are unlikely to commit tolong-term charter contracts or investments. In conclusion,NPLs is said to have stabilised and while additional NPLincidences will still be seen, it will not be as large as in theprevious quarters.
NIM guided to be flat from FY16; loan growth at 5-6% forFY17.NIM is expected to pick up from 1Q17 , owing mainlyto the absence of adjustments made to the interest incomerelated to NPLs (which is not likely to recur in coming quarters), possible loan re-pricing following rate hikes andfrom stronger loan demand.Management has guided forNIM to hover around 1.66-1.67% - levels seen towards theend of 2016.Loans are expected to grow at 5-6% for FY17,following a strong 1Q17.
Capital levels to improve over time.Capital levels are expected to improve from here with a more efficient use ofcapital and as the bank moves towards growing higherquality loans. The scrip dividend scheme may be called backif there are new business opportunities and if Basel 4 requires additional capital from higher risk-weighted assets.
Maintain HOLD,TP at S$10.30. We maintain our earningsforecasts, recommendation and target price. We believemost of the positives are priced in; the wildcard being thesustainability of its wealth management and insurance
businesses, which could act as a catalyst. Our TP implies 1.1xFY17F BV and is derived from the Gordon Growth Model(10.5% ROE,3% growth, 9.6% cost of equity).$OVERSEA-CHINESE BANKING CORP(O39.SI)$
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