Rating: BUY
12-Month Target Price: 12.80
RIDING ON ITS UNDERAPPRECIATED LINK
Riding on its unappreciated Greater China franchise. We believe the market is still underappreciating the OCBC-WHB’s franchise in Greater China. With its enlarged Greater China presence, OCBC’s growth prospects in wealth management, retail & commercial banking and insurance are further enhanced. Active cross-selling for OCBC’s private banking and insurance businesses are key wins. Integration is still on-going but signs of improvement are visible in its wealth management income line.
Solid non-interest income franchise to drive earnings. We expect wealth management income to continue its upward trajectory, potentially contributing up to 20% of non-interest income (excluding insurance). Insurance contribution could be volatile due to interest rate movements. As such, underlying growth in new business embedded value and total weighted sales should be the focus parameters for insurance, and these have been robust.
NIM should improve; sluggish loan growth ahead. Expect 2Q15 NIM to improve but loan growth (ex OCBC-WHB) would likely remain sluggish. We forecast 6% loan growth for 2015 with flat NIM y-o-y. Non-interest income will remain a space to watch.To recap, in 1Q15, loan yields increased due to the SIBOR/SOR uptick but NIM slipped as surplus liquidity was redeployed into lower yielding assets in addition to funding cost pressures. Excluding OCBC-WHB, loans grew 4% y-o-y.
Valuation:
Our S$12.80 TP which implies 1.4x FY16F BV is derived from the Gordon Growth Model. We believe OCBC’s share price should re-rate on clarity of earnings enhancement from OCBC- WHB. The potential reach from its differentiated non-interest income franchise should support valuations. A turn in the interest rate cycle with minimal disruption to asset quality would be testimony of its credit robustness.
Key Risks to Our View:
Slower traction in wealth management business . As a growing income contributor, stricter regulatory requirements for private banking clients could slow growth. Additionally, weak and volatile markets could put customers on a risk-off mode, reducing investment activities. Inability to fully integrate Wing Hang Bank’s business. Inability to extract synergies from its acquisition of Wing Hang Bank could take a longer-than-expected toll on EPS/ROI.
Share Price Drivers:
Delivery of Wing Hang integration synergies would be a key catalyst for the stock. We believe market will continue to watch closely as OCBC proceeds to integrate its businesses in China and Hong Kong. OCBC has outlined its grand plans as benefits of this acquisition. While some synergies have trickled in, it has not been sufficient enough for a re-rating.
Still trading below its 10-year mean P/BV and PE bands. Singapore banks have long waited for a strong re-rating. Earnings risks are low but investors seem to feel unexcited with its growth drivers. OCBC is still trading below its 10-year mean P/BV and PE bands. While the acquisition of Wing Hang Bank took a drag on valuations, that phase is over, in our view. Materialisation of synergies from this acquisition coupled with a turn in the interest rate cycle with minimal disruption to asset quality would be a strong re-rating catalyst.
Source: DBS Group Research
