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OCBC 4Q17 Results Summary

Core Content

This document presents the financial performance of Oversea-Chinese Banking Corp (OCBC) for the fourth quarter of 2017 (4Q17), including key financial metrics, business performance, and investment recommendations. The report highlights both the positives and negatives of OCBC's financial results, evaluates its growth prospects, and provides valuation insights based on the Gordon Growth Model.

Main Points

Financial Highlights

• Net Interest Income (NII): Increased by 14% YoY to SGD 1,424 million, driven by strong loans growth and higher Net Interest Margin (NIM).
• Fees & Commission: Rose by 17% YoY to SGD 491 million, primarily due to a significant increase in Wealth Management (WM) fee income.
• Insurance: Grew by 64% YoY to SGD 299 million, attributed to higher Life Assurance profit.
• Other Non-Interest Income: Increased by 28% YoY to SGD 415 million, mainly from higher net gains on investment securities.
• PATMI (Profit After Tax and Minority Interest): Achieved SGD 1,033 million, up 31% YoY and in line with estimates.

Business Performance

• Loans Growth: Total loans increased by 7.8% YoY to SGD 237,321 million, outpacing the Singapore domestic system growth. Property-related loans and general commerce loans showed strong growth.
• Strong NII Growth: NII rose by 14% YoY, supported by improved NIM and robust loan growth.
• Wealth Management: Total WM income surged by 54% YoY to SGD 944 million, with Bank of Singapore's AUM reaching SGD 99 billion.
• Insurance Performance: Insurance profit continued its strong growth due to asset and liability repositioning.
• Offshore Exposure: OCBC reduced its exposure to the Offshore Support Vessels (OSV) sector to SGD 4.8 billion, with SGD 1.9 billion classified as Non-Performing Loans (NPL), representing 40% of OSV exposure.

Investment Recommendation

• Upgrade to Buy: Based on the Gordon Growth Model, with a target price of SGD 13.94 (up from SGD 13.48).
• Valuation Metrics: Using a risk-free rate of 3.0%, equity risk premium of 5.7%, and a beta of 1.02, the cost of equity is 8.8%. The terminal growth rate (g) is 2.0%, and the Return on Equity (ROE) for FY17 is 12.0%.

Key Information

Financial Ratios

• ROE (Return on Equity): Improved from 10.0% in FY16 to 12.0% in FY18e.
• ROA (Return on Assets): Increased to 1.2% in FY18e.
• NPL Ratio: Rose to 1.5% in 4Q17, but reduced exposure to OSV helped mitigate risk.
• Cost/Income Ratio: Decreased to 41.7% in FY18e, indicating improved efficiency.
• P/E Ratio (adjusted): Decreased to 10.4 in FY18e, suggesting potential undervaluation.
• P/BV Ratio: Remained at 1.0 in FY18e, reflecting a stable valuation.

Outlook and Growth Catalysts

• Loans Growth: Expected to grow at a high single-digit rate in FY18e, with an improved outlook from 6% to ~8%.
• Greater China Business: Demonstrated strong traction, with OCBC Wing Hang's FY17 total income up 13%.
• En Bloc Sales: Expected to boost wealth management activities in Singapore, benefiting OCBC's Bank of Singapore.
• Economic Conditions: Moderately strong economic growth is expected to support NII growth in FY18e.

Risk and Challenges

• Net Trading Income: Remained weak YoY and QoQ, reflecting a challenging global FICC trading environment.
• OCBC Wing Hang Performance: Net profit declined by 2% YoY, affected by lower Non-II, higher allowances, and operating expenses.

Summary of Key Financial Tables

Table 1: Fee and Commission Income

• Wealth Management: Increased by 37.6% YoY to SGD 216 million.
• Brokerage: Rose by 5.9% YoY to SGD 18 million.
• Fund Management: Grew by 3.7% YoY to SGD 28 million.
• Total Fee and Commission Income: Increased by 16.9% YoY to SGD 491 million.

Table 2: Other Non-Interest Income

• Net Trading Income: Declined by 18.9% YoY to SGD 99 million.
• Net Gain on Investment Securities: Surged by 361.1% YoY to SGD 249 million.
• Total Other Non-Interest Income: Grew by 34.9% YoY to SGD 383 million.

Table 3: Loans by Industries

• Property-related Loans: Strong YoY and QoY growth.
• General Commerce Loans: Grew by 14.4% YoY, reflecting robust economic conditions.

Table 4: Loans by Currencies

• SGD Loans: Increased by 5.2% YoY to SGD 85,485 million.
• USD Loans: Grew by 8.6% YoY to SGD 61,445 million.
• HKD Loans: Rose by 8.8% YoY to SGD 33,011 million.

Table 5: Operating Profit by Business Segments

• Global Consumer/ Private Banking: Grew by 11.3% YoY to SGD 286 million.
• Insurance: Increased by 115.8% YoY to SGD 479 million.
• Total Operating Profit: Rose by 56.6% YoY to SGD 1,358 million.

Table 6: Profit Before Tax by Geographical Segments

• Singapore: Grew by 72.8% YoY to SGD 800 million.
• Rest of the World: Increased by 56.4% YoY to SGD 61 million.
• Total Profit Before Tax: Rose by 31.9% YoY to SGD 1,819 million.

Conclusion

OCBC's 4Q17 results show strong performance across multiple segments, with notable growth in loans and fees, and a significant improvement in insurance profits. The company's reduced offshore exposure and improved NIM support its financial stability. Despite weak net trading income, the overall financial health and growth potential led to an upgrade to "Buy" with a higher target price. The report emphasizes both quantitative and qualitative factors in making investment recommendations, considering market sentiment and growth catalysts.