SINGAPORE (Oct 10): UOB Kay Hian is keeping its “buy” call on Oversea-Chinese Banking Corporation (OCBC) with a target price of $13.38 given expectations the bank could report steady earnings growth for the third quarter of 2017.
“We forecast net profit at $958 million for 3Q17, up 1.6% year-on-year,” says UOB analyst Jonathan Koh in a report on Friday. “We foresee healthy loan growth in 3Q17 driven by trade finance, residential mortgages and investment loans for overseas expansion.”
The report comes ahead of the release of OCBC’s 3Q17 financial results, which is expected to be announced before market opens on Oct 26.
In addition, OCBC is also expected to see its net interest margin (NIM) edge up marginally higher.
While Singapore's 3-month SIBOR and SOR rates have climbed by 13 basis points and 20 basis points respectively, Koh says the positive impact will take more time to be reflected, due to the time lag to re-price loans.
In addition, double-digit growth from fee income is expected to continue, albeit at a slower pace.
According to Koh, fees from wealth management is expected to have slowed to a growth of 32% y-o-y to reach $205 million. This compared to a growth of 66% in the first half of 2017, which was boosted by upfront fees from distribution of funds managed by BlackRock and Invesco.
“Overall, we expect total fees and commissions to have increased by 12% y-o-y to $479 million,” he adds.
Still, higher provisions are expected for 3Q17, on the back of deterioration in valuations of collaterals.
“We expect total provisions to have increased 6% q-o-q to $180 million due to a quarterly review in valuations of collaterals, which resulted in some shortfall in provisions,” Koh says. “There was some increase in non-performing loans (NPLs) from the Oil & Gas sector but asset quality remains generally stable for other industry sectors.”
Looking ahead, Koh says the upcoming initial public offering (IPO) for Great Eastern Malaysia as well as a potential review of OCBC’s dividend policy, could spur its share price performance.
“The stabilisation of asset quality would also remind investors that OCBC has a conservative management team and that the quality of its earnings is solid,” he adds.
As at 11.37am, shares in OCBC are trading 9 cents lower at $11.30 or 12 times FY17 book with a dividend yield of 3.2%.
