Riding on its unappreciated Greater China franchise
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 .
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
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.
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
Labels: Banks, OCBC