SINGAPORE (May 9): Maybank Kim Eng is maintaining OCBC Bank at “buy” despite the lender reporting 1Q18 core PATMI of $1.1 billion which slightly missed expectations.
Excluding Great Eastern, OCBC’s operating profit was “decent”, says Maybank, reflecting good underlying performance and earnings momentum.
“We revise FY18-20 net profit downwards by 2%. With that, our assumed sustainable ROE is now 13.8%,” says analyst Ng Li Hiang in a Tuesday report.
Maybank’s target price is also reduced by 2% to $14.60 based on 1.5 times FY18E P/BV, 1SD above its historical mean of 1.3 times to reflect higher forecast ROEs.
“We believe OCBC valuation multiple deserves to rise in view of its ability to expand ROEs from NII (non-interest income) growth,” says Ng.
Unlike DBS and UOB which saw higher repricing effects working their way through in a higher rate environment, OCBC’s NIM were flat q-o-q at 1.67% as cost of funds increased by 12bps q-o-q.
See also: Maybank lifts Sea's TP to US$110 as it sees new monetisation initiatives such as advertising growth
Customer spreads fell 10bps y-o-y to 1.85% while sticky CASA (current accounts, savings account) deposit now form 47% of total deposits in 1Q18.
Management attributed flat NIM (Net interest margins) +from margin compression in Indonesia and lower-yielding margins from trade loans, as OCBC’s general commerce loans grew 4% q-o-q vs peers’ 2%.
“We factor in a higher Sibor forecast for FY18 of 1.65% from 1.55% according to our Singapore economist, offset by higher cost of funds. This raised net interest income slightly by 1-2% for FY18-20. Management reiterated high single digit loan growth for FY18 and we maintain our loan growth assumption of 10% y-o-y.
See also: Glove-maker Riverstone to benefit from recovering semiconductor sales, US-China tariffs: RHB
We lower non-II by 6% on lower net trading income, net gains from investment securities and Great Eastern’s life profits. That said, we are still projecting three-year CAGR of 12% for non-II.
1Q18’s total credit cost of 4bps is too low. We retain our credit costs of 18-20bps barring significant asset quality deterioration for FY18-20E. For every 10bps increase in credit costs, we estimate FY18-20E net profits could decline by 5%.
As at 2.58pm, shares in OCBC are up 9 cents at $13.17 or 11 times FY18 core earnings.
