OCBC Review

OCBC Stalwart Review

I have been buying OCBC shares evey month on a regular savings plan ever since May 2017 when it fell at  7.60 at Mar 2016. I am highly uncertain about the direction of price movements then and used dollar cost averaging to enforce disciplined investing, to buy more when prices fall and buy less when prices increase. I identified it is a good stalwart and dividend stock whom is hit by market cyclical headwinds leading to a irrational crash in price. Since then, Prices have jumped to 10.41per share and I am conducting a review on its fundamentals to decide if there is impact on the  buy / Hold / Sell decision. This stalwart stock has increased by approximately 21% ever since then. Holding 125 shares at dollar cost average price of 9.0753.

High Level Summary
After review the below, My conclusion is to hold the stock as it is not at risk of bankruptcy and there is future growth to be expected. However, it is still highly exposed to headwinds in oil and gas services as well as geopolitical risks. Due to the overbought nature of the stock, I will be discontinuing the share building component. This stock has good fundamentals but I am not getting any margin of safety from continuing the Dollar cost averaging purchase of this stock. In fact I am most certainly overpaying for it.

The reason I chose dollar cost averaging is to enforce disciplined investing and to pick undervalued stock that has much room to grow. Dollar cost averaging is to put my mind at ease, such that I will be undeterred by price movements to buy more as prices drop and less price increase. Since OCBC is no longer undervalued and many of the risks as well as potential of growth remains, I shall hold this Stalwart and Look out for changes in the market. But I will not be continuing purchase for it.



May 2016 Link
http://inthej.blogspot.sg/2017/03/ocbc.html

On May 2017, A review of financial position by Philip. Conservative Outlook based on risks in the global market and general overvaluation based on historical pricing.

https://www.ocbc.com/assets/pdf/quarterly-results/2017/ocbc%201q17%20media%20release.pdf

Points to take note
1) Total Income growth largely lead by sustained growth in wealth management income, higher profit from insurance operations as well as increased earnings in local currency terms from all of the Group’s overseas banking subsidiaries, particularly from Indonesia. Higher asset growth was offset by net interest margin compression. Net interest margin contracted 13 basis points from 1.75% a year ago to 1.62%, largely attributable to reduced customer loan yields and excess liquidity placed in high quality but lower yielding interbank placements.

2) Wealth management business, trading business, and insurance business are very market sentiment driven.

3) CEO’s Comments
rise in first quarter earnings. We achieved broad-based loan growth, grew our private banking AUM, and reported significantly higher fee income. Our Hong Kong, Malaysian and Indonesian banking subsidiaries saw higher year-on-year earnings growth in local currency terms and Great Eastern continued to deliver robust underlying total weighted new sales and new business embedded value growth. The overall quality of the loan portfolio remained stable. Although the stress in the oil & gas support services sector is continuing, sufficient provisions have been made. We have a strong capital and liquidity position, and launched our maiden Covered Bond Programme which further diversified our funding base. While we see some sectorial strength in the domestic economy, this is not yet broad-based, and we remain watchful to the persistent headwinds in the operating environment. Our core businesses are resilient, we remain prudent and focused on our strategic priorities, and are well-placed to capture opportunities as they arise”.


4) Average customer loans grew 5% year-on-year led by broad-based growth across most industry segments and key markets Increase in Book value due to purchase of wealth management business from National Australian Bank. Generally the quality of loans and client bases purchased is high, improves its book value and boost its amount of loans / assets.  Organic growth in loans is much slower and they are taking over these assets to boost its profitability.
Evident drawing down on free cash flow to purchase assets that bring in further growth.

5) non-interest income rose 30% to S$977 million from S$753 million a year ago. Fee and

commission income climbed 29% to S$481 million, led by a 70% rise in wealth management fee income, partly contributed by the acquisition of the former wealth and investment management business of Barclays PLC in Singapore and Hong Kong (“Barclays WIM”) in November 2016. Net trading income of S$158 million, predominantly treasury-related income from customer flows, grew 30% from S$122 million last year, while net realised gains from the sale of investment securities rose 10% to S$65 million. Profit from life assurance more than doubled from S$83 million in the preceding year to S$176 million, largely from positive performance in Great Eastern Holdings’ (“GEH”) investment portfolio as a result of favourable market conditions. GEH continued to  deliver strong underlying insurance business growth, with total weighted new sales and new business embedded value increasing 29% and 24% year-on-year respectively.

Overall wealth management income, comprising income from insurance, private banking, asset management, stockbroking and other wealth management products, grew 50% to S$724 million, from S$482 million a year ago. As a proportion of the Group’s total income, wealth management contributed 32%, as compared with 23% in 1Q16. OCBC’s private banking business continued to grow, as reflected by a significant increase in assets under management to US$85 billion (S$119 billion) as at 31 March 2017, up 49% from US$57 billion (S$77 billion) the previous year, partly contributed by the acquisition of Barclays WIM.

Operating expenses for the quarter rose 5% to S$973 million from S$923 million a year ago, driven by an increase in staff costs partly associated with the consolidation of Barclays WIM. (Excluding the consolidation of Barclays WIM, operating expenses were 3% higher against the previous year). The cost-to-income ratio was 43.3% for the  quarter, as compared to 44.8% in 1Q16. Allowances for loans and other assets were unchanged from the prior year at S$168 million. The Group’s annualised return on equity improved to 10.8% from 10.1% in 1Q16, while annualised earnings per share rose to 92.9 cents from 82.2 cents the previous year. Against the previous quarter (“4Q16”), the Group’s net profit after tax rose 23%. Net interest income grew 2% quarter-on-quarter driven by asset growth. As compared with 4Q16, net interest margin declined 1 basis point to 1.62% mainly due to a larger amount of interest income not being recognised on non-performing loans (“NPLs”). Excluding this, net interest margin for the quarter would have been higher by 2 basis points, mainly attributable to better returns from money market placements of our excess funding. Non-interest income rose 5% against the preceding quarter mainly from higher fee income, insurance and trading income.

Operating expenses fell 1% against 4Q16 while net allowances for loans and other assets declined 45% against the previous quarter. Allowances and Asset Quality

Total net allowances for loans and other assets for 1Q17 were S$168 million, as compared to S$167 million a year ago. Specific allowances for loans, net of recoveries and write-backs were S$ 108 million, as compared with S$99 million a year ago and significantly lower than S$235 million in the preceding quarter. Net specific allowances represented an annualised 20 basis points of loans for the quarter. Additional portfolio allowances of S$39 million were set aside this quarter, while allowances for other assets, mainly investments, were S$21 million. As at 31 March 2017, total non-performing assets (“NPAs”) of S$2.87 billion were slightly lower than S$2.89 billion in 4Q16 but were higher than S$2.22 billion a year ago, mainly from the downgrade of corporate accounts in the oil and gas support services sector, which continued to be under stress as oil prices remained depressed. The overall NPL ratio was 1.3%, unchanged from the previous quarter. Coverage ratios remained healthy and total cumulative allowances covered 297% of unsecured NPAs and 101% of total NPAs at the end of 1Q17. Funding and Capital Position The Group’s funding and capital position continued to be strong as at 31 March 2017. Customer loans rose 8% to S$225 billion while customer deposits increased 9% to S$265 billion. The growth in customer deposits was driven by an 11% rise in current account and savings (“CASA”) deposits to S$132 billion, and the ratio of CASA to total non-bank deposits improved to 49.9% from 49.3% a year ago. The loans-to-deposits ratio was 83.6% compared to 84.7% the previous year. In March 2017, OCBC Bank launched its inaugural EUR 500 million 5-year covered bond offering under the US$10 billion Global Covered Bond Programme, which further broadened the Group’s funding base. For 1Q17, the average Singapore dollar and all-currency liquidity coverage ratios for the Group (excluding OCBC Wing Hang which will be included in due course) were 267% and 143% respectively, higher as compared to the respective regulatory ratios of 100% and 80%. The Group’s Common Equity Tier 1 capital adequacy ratio (“CAR”), Tier 1 CAR and Total CAR as at 31 March 2017, were 13.3%, 14.2% and 16.5% respectively. Based on Basel III transitional arrangements, these ratios were well above the respective regulatory minima of 6.5%, 8% and 10%. In addition to these minimum capital requirements, a capital conservation buffer (“CCB”) of 2.5% and countercyclical buffer of up to 2.5% will be phased in from 2016 to 2019. The CCB was 1.25% as at 1 January 2017, and will be increased by 0.625% each year to reach 2.5% on 1 January 2019. The

Group’s leverage ratio of 7.7% was better than the 3% minimum requirement as guided by the Basel Committee.