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Trades at only 1x book
We believe concern over the China exposure via its newly acquired Wing Hang Bank has been one of the reasons for the recent underperformance. The results YTD suggest that the risk to China is well-contained. We rate the stock a Buy because of its inexpensive valuation and we believe its earnings could grow by 10% in 2016 as it benefits from the rising local interest rates. We also believe that earnings could potentially surprise on the upside if the bank is able to derive synergies from its Wing Hang acquisition.
Asset quality not a concern
While the market remains generally concerned with asset quality for most banks, OCBC’s recent 3Q results showed that while NPLs and credit cost were up, they did not increase significantly. While the NPL had deteriorated to 0.9% from 2Q’s 0.7%, the management highlighted that most of this was due to restructured loans and most of them were still servicing their payments. 46% of the NPLs are not overdue in their payments and 80% of the restructured loans are in the substandard category. Management came across as fairly comfortable with the asset quality.
Valuation: Our TP implies a 12-month forward P/BV of 1.35x
We revise down our 2016 EPS estimate by 5% and this is on the back of slower loan growth assumptions. Our target price of SGD 12.0 is based on the Gordon Growth Model with the key assumptions being a COE of 9.5% and ROE of 12.8%. (Read Report)
Source : Monura Global Markets Research