OCBC

Kim Eng on 12 April

Upgrade to Hold. That OCBC’s YTD share price performance has lagged its peers’ is unjustified, we believe, given its strong risk management capabilities, growing wealth management franchise, much improved CASA-gathering capabilities and relative shelter from any correction in the property market. We do feel that valuations are still a little rich at this stage but a premium to peers is deserved. Our TP is raised to S$8.00 from S$7.50, on a higher P/BV multiple of 1.2x (1.1x previously) to reflect the stronger fundamentals.

A burgeoning wealth management franchise. In recent years, OCBC’s fee income base has expanded rapidly from just 15% of total income to 20% presently, catching up with peers. Undoubtedly Bank of Singapore (BOS) has been a key contributory factor, but this wealth management franchise is strongly supported by Lion Global Investors and Great Eastern (GE). Combined wealth management revenue from these outfits currently make up 23% of total group revenue.

Much improved CASA-gathering capabilities. OCBC has traditionally lagged its peers in terms of CASA but efforts have been stepped up in recent years and OCBC’s proportion of CASA to total deposits has improved 18 ppts since 2007 to 46%, as compared to a 13-ppt improvement for DBS (to 62%) and 8-ppt rise for UOB (to 40%).

Strong risk management capability. This is reflected in its superior NPL numbers (gross NPL ratio of 0.87% vs. peer average of 1.4%) and low charge-off rates (0.18% vs. peers’ 0.4%). Moreover, loan loss coverage is healthy at 107% of total non-performing assets (NPAs) and 326% of total unsecured NPAs.

A more resilient property portfolio. Indicators point to a softening of the top end of the property market and OCBC, with its larger presence in the HDB market, is likely to be more sheltered. 70% of its book comprises owner-occupied property. The average loan-to-value (LTV) ratio for first-time buyers is about 80%; it is 60% for buyers of subsequent properties. The LTV for property developers is <50% for properties under construction and <60% for completed properties.