SINGAPORE (July 14): UOB Kay Hian is reiterating its “buy” call on Oversea-Chinese Banking Corporation (OCBC) with a target price of $13, in anticipation of broad-based growth as well as resilient asset quality to be reflected in the bank’s upcoming 2Q17 financial statement release.
The research house is forecasting a net profit of $946 million for the quarter, which represents a 6.9% growth y-o-y but a 2.8% decline q-o-q.
In a Friday report, analyst Jonathan Koh opines that the bank is on track to meet its guidance for mid-single-digit loan growth for 2017.
He expects a slight uptick of 1bp q-o-q for OCBC’s net interest margin (NIM) in 2Q17 on the back of lower cost of deposits, as the bank collected more current and savings accounts (CASA) from small medium enterprises (SMEs) over the quarter.
While the bank benefited from a pick-up in corporate loans from short-term trade finance and working capital loans, the analyst also notes healthy growth on the consumer front from residential mortgages and financing of leveraged investments for the bank’s high net worth clients.
Meanwhile, Koh highlights that high net worth clients remained on a ‘risk-on mode’, as well as encouraging wealth management and bancassurance fees.
“There was healthy growth in trade-related fees. We expect a stable contribution of $205 million from insurance as bond yields eased but only marginally in both Singapore and Malaysia,” says the analyst, who also expects the bank to experience healthy flows from treasury customers in 2Q.
Due to a pay increment which was implemented in April, Koh estimates operating expense to increase 5.9% on-year.
OCBC’s nonperforming loan (NPL) ratio, however, is believed to remain relatively unchanged at 1.25% as new NPLs were offset by recoveries.
And as there was no further damage from the oil and gas (O&G) sector, Koh believes provisions would have stayed flat q-o-q over the quarter as compared to the -45% q-o-q decline in 1Q17, despite the need to top-up provisions due to deterioration in the valuations of collaterals.
“We believe investors would take note of the stabilisation in asset quality and react positively,” concludes the analyst.
As at 11.39am, shares of OCBC are trading 5 cents higher at $10.96.
