SINGAPORE (July 28): RHB is remaining “neutral” on Oversea-Chinese Banking Corporation (OCBC) with a higher target price of $10.96 from $10.22 previously after the bank yesterday posted a 22% rise in earnings to $1.1 billion for the quarter ended June, coming in slightly above the research house’s expectations.
See: OCBC earnings up 22% to $1.1 bil in 2Q
In a Thursday report, analyst Leng Seng Choon notes that while the group’s earnings for 2Q were mainly lifted by higher profit from its its life assurance and wealth management segments, he assumes for the strong performance in Great Eastern Holdings’ (GEH) portfolio not to persist.
“We raise our 2017 net profit forecast by 7% as we increased insurance income by 20%, and lowered provisions assumptions. Whilst these are positives, OCBC’s lower-than-peers’ loan loss coverage of 101% points to a risk of higher provisions, should oil prices fall,” says Leng.
Looking ahead, Leng recaps that the bank’s management has guided for mid-single-digit 2017F loan growth which would further contribute to net interest income (NII) growth, with 2017F NIM expected to expand 3bps q-o-q to 1.67-1.68% as compared to 2Q17’s 1.65%.
OCBC’s non-performing loan (NPL) ratio is also expected to rise marginally over future quarters, reiterates the analyst, adding that while management expects a stabilisation to happen for OCBC’s oil and gas (O&G) loan portfolio, it does not see a recovery for this segment as of it, as the crude oil price remains low at below US$50 per bbl.
As such, RHB has forecasted an NPL ratio of 1.5% for OCBC at end-2017.
“The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represent the upside risks,” concludes Leng.
As at 9.38am, shares of OCBC are trading 1% lower at $11.38.
