Outlook for OCBC appears mixed to analysts

SINGAPORE (May 13): UOB KayHian is maintaining Oversea-Chinese Banking Corp (OCBC) at “buy” with a target price of $14.62 based on 1.42 times FY19F book.

See: OCBC reports 11% rise in 1Q19 earnings of $1.23 bil on strong income growth

“We raised our earnings forecast for 2019 by 2.2% after factoring in the better-than-expected results for 1Q19,” says OCBC analyst Jonathan Koh.

Although OCBC’s management expects global economic growth to slow, UOB says strong capital and funding base as well as stringent cost control will enable OCBC to continue expanding its franchise in key markets.

In addition, UOB says OCBC's strong CET-1 CAR of 14.2% should put the bank in good stead to weather uncertainties that arise from the US-China trade conflict.

OCBC could also deploy surplus capital for inorganic expansion should the opportunity arise. OCBC will deepen its presence in its core businesses of commercial banking, private banking and insurance and core markets of Singapore, Malaysia, Indonesia and Greater China.

Management will look at increasing its stake in Bank of Ningbo and setting up a Bank of Singapore (BOS) branch at Qianhai.

Jefferies says OCBC’s 1Q net income of $1.23 billion was 5% ahead of the house’s and consensus’ expectations, driven by loan growth, margins and non-interest income.

However, the research house is maintaining OCBC on “hold” saying the stock has underperformed peers by about 2-6% over the last 12 months.

Despite the strong start for the year, Jefferies says change in credit cost guidance is likely to pose downside risk to its estimates.

OCBC’s 1Q annualised credit cost was 35 bps versus 27 bps in 4Q and 4 bps in 1Q18. The increase was due to higher specific allowances for offshore support vessels as higher oil prices did not result in improved utilisation or charter rates.

In line with higher credit cost for the 1Q, Jefferies is raising its credit cost guidance for the full year by 7 bps to about 22 bps from prior range of 12-15 bps.

“Our current estimate is for 13.5bps for FY19 and hence has a downside risk,” says analyst Krishna Guha.

CGS-CIMB Securities is maintaining a “Hold” with higher GGM-based target price of $12.59.

The rebound in OCBC’s 1Q trading income from a low of $9 million in 4Q18 to an all-time high of $285 million was due to strong investment and MTM gains at Great Eastern.

However, CGS-CIMB analyst Andrea Choong thinks these market-related income lines could be unsustainable and may moderate over the upcoming quarters.

In addition, although there has been no new NPA formation from the oil-and-gas sector and OCBC does not expect further provisions on this portfolio, CGS-CIMB is revising its FY19 credit cost estimate upwards to 20bp (from 15bp) to incorporate this.

Phillip Capital is also downgrading OCBC to “Accumulate” at a lower target price of $12.70 from $13.70 previously mainly due to an increase in the house’s credit cost forecast for FY19E from 14 bps to 22bps.

Phillip says OCBC’s allowances spiked to $249 million from an unusual low of $12 million in 1Q18 reducing the collateral valuations further to scrap value.

The unrealised assumptions of recovery in oil drilling activities and higher availability in other sources such as renewable energy resulted in amendments to OCBC’s ECL model.

Unemployed vessels require high reactivation costs before going back on the market, and these vessels’ current outfit of technology may not meet the latest market requirements of operating regulations, requiring further upgrading costs.

Due to the additional provisioning this quarter, Phillip has also raised its credit cost guidance by 7bps to 19-22bps and increase its credit cost forecast for FY19E from 14 bps to 22bps.

Given housing loans contracted y-o-y for the first time in more than a decade at -1.3%. Phillip believes that similar to its peers, OCBC’s mortgage loan business faced stiff competition for refinancing and lower volume of new bookings.

Finally, RHB Research is keeping OCBC at “Neutral” with $12.20 target price based on 1.12x 2020F book value after 1Q19 net profit came in at 26% of RHB’s and street’s FY19 estimates.

Phillip is also forecasting 2019 NIM of 1.76%, loan growth of 4.5% and is also positive on wealth management income’s continued growth going forward.

However, Phillip does not expect gains from net trading income can sustained although digitisation efforts will help to improve efficiency.

“Overall, we have assumed long-term ROE of 12%,” says analyst Leng Seng Choon.

As at 12.07pm, shares in OCBC are down 17 cents at $11.22.