Monday, February 17, 2014

OCBC - Deposit influx did not kill NIM

What stood out for us? 
Operating trends. NII rose 5.5% qoq as loans grew 4.8%, trade-driven. 4Q numbers show why OCBC wants to get into HK. China-related trade finance opportunities are just booming. Non-NII was, as expected, seasonally weaker (-13.1% qoq), partly capital markets and partly due to lower qoq GEH’s accounting contributions. GEH’s NBEV growth was particularly impressive.Positive data points. Time deposit competition stiffened at end-2013 and OCBC seems to be a beneficiary of that, chalking up a big quarter for deposit growth (+8% qoq), mostly time deposits. Yet, this did not squeeze NIMs (+1bp qoq). We think this has positive margin implications. Management guided that funding cost pressures can be mitigated by 1) higher mortgage spreads as we reach the end of a refinancing cycle for a vintage of high-spreads mortgages, and 2) ability to raise corporate spreads. Another positive is NPL improvement, implying that the higher 3Q NPL is not an early harbinger of trouble.   
Outlook for 2014 
Management guided for 1) loan growth of 11-13% in 2014, still driven by trade, 2) stable NIMs, 3) cost pressures from compliance costs and IT investments, and 4) no asset quality issues. Domestic loan growth is likely to be weak and OCBC will focus on faster-growing markets in ASEAN and Greater China.   
Upgrade to Add 
OCBC’s share price has underperformed YTD on concerns that it is overpaying for Wing Hang Bank. We see limited downside from here. We are impressed with its margin resilience despite a deposit influx, pristine credit quality and strong NBEV growth for GEH. We upgrade it from reduce to Add.

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