Possible collapse in asset quality puts OCBC’s stellar performance at risk

Loans could fall as fast as they surged.

OCBC’s 4Q performance was somewhat distorted by the integration of Wing Hang Bank, including higher costs from integration and higher credit costs after aligning WHB's provisioning policy with OCBC.

According to Sharnie Wong, analyst at Barclays, OCBC’s capital position is expected to improve and its margin to rise. DBS adds that integration is ongoing and should start to yield results in 2015. A clear upside was identifiable from the boost in its US$ and RMB deposit growth.

The downside risks that would impede the stock are: i) macro outlook improvement in the US fizzling out resulting in a deferment of US interest rate normalisation, ii) potential hiccups in the integration of OCBC-WH, resulting in lowerthan-expected contributions to group earnings, and iii) sharper-than-expected deterioration in asset quality.

Barclays agrees, saying "We see slowing loan growth and asset quality normalization as the key downside risks."

OSK-DMG analysts report that with OCBC WH, Greater China loans rose 107% YoY to SGD56bn in Dec 2014 and accounted for 27% of total loans (2013: 16%), while the group’s USD loan-to-deposit ratio (LDR) improved to 89% from high of 106% in Mar 2014 and its CNY LDR declined to 75% (Mar 2014: 117%). Asset quality remained sound with gross impaired loans (GIL) down 4% QoQ in Dec 2014, GIL ratio at a low 0.6% and loan loss reserves ratio at 174%.

Here’s more from OSK-DMG:

Although OCBC WH’s net profit contribution of SGD43m in 4Q14 (3Q14: SGD38m) is lower than earlier guidance of a quarterly run-rate of SGD70-75m, management believes growth momentum would improve. Furthermore, there were still some integration costs in 4Q14 that weighed on earnings growth.