OCBC's bad loans to hit 1.4% in 2016

Profits may grow 3% on O&M woes.

OCBC braces for more waves of further deterioration in asset quality, with NPL ratio seen to hit 1.4% by end-2016 (from 3Q16’s 1.2%), said RHB.

3Q16 credit cost of 31bps was up from 2Q16’s 12bps, which is lower than RHB's expectation. As NPL ratio rose to 1.2% (2Q16: 1.1%), LLC was flattish at 101% as provisions doubled QoQ

"Our view is that further deterioration in oil & gas asset quality could contribute to total provisions rising by 54% in 2017, which would be a drag on earnings. We assume a 1.4% NPL ratio by end-2016," it said.

The brokerage firm expects OCBC's NIM to remain squeezed in 4Q16, though the anticipated Fed Funds rate hike in December should help to widen 2017 NIM.

"With 3Q16 net profit in line, we raise 2016F net profit by a marginal 3%, on higher forecast non-interest income," it said.

RHB notes that the downside risks to its forecast include higherthan-expected impairment charges and weaker-than-expected NIMs. The converse represents the upside risks.