What surprised us
OCBC held an analyst briefing post 3Q15 results where it reported net core profit of S$902mn, +7% yoy/-4% qoq, in line with GSe (S$912mn).
Key focus points were:
(1) Asset quality deterioration was mainly down to a few names in O&G service sector mainly to owners of vessels and rigs in Singapore and Malaysia. Most of the NPLs came from loans which were performing but had undergone rescheduling/restructuring and as such were now booked as NPLs. OCBC’s O&G loans are now reduced to 6% of total loans vs 2Q’s 7% and within which 40% are to O&G support services. Commodities exposure remains unchanged at 7% of total loans. NPLs from this segment remain close to 0%. Aside from O&G services, management commented that asset quality for the rest of the portfolio remains benign; trade finance as well has not seen any bad debts and is likely to remain manageable. Although loan loss coverage has fallen to 125% from 156% in 2Q15, management sees this level as sufficient for the current NPLs.
(2) Loan growth to remain lackluster at low single digits for 2015 as OCBC continues to see weakness in the regional economy. OCBC also commented that it will take a more cautious lending position in Malaysia due to concerns on the macro recovery.
(3) Fee income growth to remain a focus. OCBC expects wealth management should see continued growth from rising wealth level in Asia.
What to do with the stock
Post 3Q15 results, we lower our FY15-FY17E EPS by up to 3.9% to account for higher credit cost on weak economic outlook. Consequently we lower our 12m RIM-based TP to S$10.7 from S$11.1; (0.92% LT ROA, 9% COE unchanged). Maintain Neutral rating.
upside: lower-than-expected credit costs,
downside: weaker-than-expected NIM & top line. (Read Report)
Read Related Reports
1) Oversea-Chinese Banking Corporation - 3Q15: Most earnings drivers weak; NPLs up across geographies by Credit Suisse Asia Pacific Equity Research, published on 29 October 2015
2) Oversea-Chinese Banking Corp Ltd - Sailing through the oily seas by KGI Fraser Research, published on 29 October 2015
3) OCBC Bank - Risk on by Maybank Kim Eng Research, published on 29 October 2015
4) OCBC - Proactive Restructuring Of Oil & Gas Loans by RHB Research, published on 29 October 2015
5) OCBC - NPL trends less alarming, when explained by CIMB Research, published on 28 October 2015
6) Oversea-Chinese Banking Corporation - Underlying growth with few signs of distress by Daiwa Capital Markets, published on 28 October 2015
7) Oversea-Chinese Banking Corporation - A reassuring 3Q15 performance by Daiwa Capital Markets, published on 28 October 2015
8) OCBC - Expectedly weak non-interest income and higher provisions by DBS Group Research, published on 28 October 2015
9) OCBC - Hold: A muted quarter with weak trends by HSBC Global Research, published on 28 October 2015
10) Idea Of The Day - Oversea-Chinese Banking Corporation Limited by Lim & Tan Research, published on 28 October 2015
11) OCBC - Asset quality headwinds from Oil & Gas by Macquarie Research, published on 28 October 2015
12) OCBC - Strong P&L but watchful on asset quality by Macquarie Research, published on 28 October 2015
13) OCBC - 3Q15 Core Net Profit At SGD902m by RHB Research, published on 28 October 2015
Source : Goldman Sachs Equity Research