OCBC - Riding on its unappreciated link

Riding on its unappreciated Greater China franchise
We believe the market is still underappreciating the OCBC-WHB’s franchise in Greater China. With its enlarged Greater China presence, OCBC’s growth prospects in wealth management, retail & commercial banking and insurance are further enhanced. Active cross-selling for OCBC’s private banking and insurance businesses are key wins. Integration is still on-going but signs of improvement are visible in its wealth management income line. Solid non-interest income franchise to drive earnings . 

We expect wealth management income to continue its upward trajectory, potentially contributing up to 20% of non-interest income (excluding insurance). Insurance contribution could be volatile due to interest rate movements. As such, underlying growth in new business embedded value and total weighted sales should be the focus parameters for insurance, and these have been robust.

NIM should improve; sluggish loan growth ahead
Expect 2Q15 NIM to improve but loan growth (ex OCBC-WHB) would likely remain sluggish. We forecast 6% loan growth for 2015 with flat NIM y-o-y. Non-interest income will remain a space to watch.To recap, in 1Q15, loan yields increased due to the SIBOR/SOR uptick but NIM slipped as surplus liquidity was redeployed into lower yielding assets in addition to funding cost pressures. Excluding OCBC-WHB, loans grew 4% y-o-y.


Technical Analysis
Daily Chart
Valuation:
Our S$12.80 TP which implies 1.4x FY16F BV is derived from the Gordon Growth Model. We believe OCBC’s share price should re-rate on clarity of earnings enhancement from OCBCWHB. The potential reach from its differentiated non-interest income franchise should support valuations. A turn in the interest rate cycle with minimal disruption to asset quality would be testimony of its credit robustness.

Key Risks to Our View:
Slower traction in wealth management business. As a growing income contributor, stricter regulatory requirements for private banking clients could slow growth. Additionally, weak and volatile markets could put customers on a risk-off mode, reducing investment activities. Inability to fully integrate Wing Hang Bank’s business. Inability to extract synergies from its acquisition of Wing Hang Bank could take a longer-than-expected toll on EPS/ROE. (Read Report)

Source : DBS Group Research

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