SINGAPORE (May 8): Oversea-Chinese Banking Corporation (OCBC) on Monday before market open posted a set of good results for the 1Q18 ended March.
Earnings for the quarter rose 29% year-on-year to $1.11 billion, as net interest income (NII) grew 11% to $1.42 billion.
See: OCBC reports 29% rise in 1Q to $1.1 bil on lower loan provisions and higher income from lending and wealth management
Yet, OCBC’s share price fell by 3.5% to close at $13.17 on the same day.
“The key negative was flat quarter-on-quarter net interest margin (NIM), due to high proportion of trade loans and Indonesia. This dimmed the positivity from loans, which grew 4 basis points q-o-q,” says CGS-CIMB Research analyst Yeo Zhi Bin in a report on Monday.
Unlike Singapore banking peers at DBS Group Holdings and United Overseas Bank (UOB), OCBC’s loan margins failed to widen from the previous quarter even as benchmark interest rates rose. And this is causing some concern.
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CGS-CIMB is downgrading OCBC to “hold”, from “buy” previously. The research house is also cutting its target price to $14.00, from $15.00 previously.
See: OCBC drops on concern profit growth relied on loan provisions
The q-o-q weakness in Great Eastern Holdings (GEH) and [Monday’s] drop in share price also reflected the need to deliver quarterly earnings,” says Yeo. “That said, insurance earnings are backward-looking.”
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GEH saw its earnings jump 68% to $152.9 million in the 1Q ended March, mainly due to higher operating profit and lower non-operating loss during the quarter.
However, Total Weighted New Sales (TWNS) fell 17% to $231.1 million in 1Q18, as a result of lower Single Premium sales in Singapore. Gross premiums fell 10% to $2.43 billion.
See: Great Eastern posts 68% rise in 1Q earnings to $152.9 mil
“From a sequential perspective, GEH ‘disappointed’ with a non-operating loss from widening credit spreads as well as lower profit from shareholders’ fund,” says Yeo.
Meanwhile, Krishna Guha, an analyst at investment bank Jefferies Singapore, opines that OCBC’s NIM is unlikely to widen for the rest of this year.
“Margin is likely to inch up in subsequent quarters of FY 18 as LDRs improve but may be offset as funding cost catches up with falling CASA ratio,” Guha says. “We raise full year loan growth forecast from 8% to 10% and lower 2018 NIM from 172 to 169 bps.”
“While we are watchful of tightening financial conditions and elevated valuation, our rating remains unchanged on the back of momentum in banking, wealth management (WM) and insurance,” he adds.
Jefferies is keeping its “buy” call on OCBC with an unchanged target price of $15.20.
As at 12.25pm, shares of OCBC are trading 3 cents down at $13.14. According to CGS-CIMB valuations, this implies an estimated price-to-earnings ratio of 12.2 times, a price-to-book ratio of 1.3 times, and a dividend yield of 2.9% for FY18.
