Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/114" target="_blank" data-smartkarma-citation="entities:114:1">Oversea Chinese Banking Corp. Limited (OCBC SP)</a>, or OCBC, bounced back from a weak fourth quarter to post a much stronger first-quarter 2017 result. Net profit was SGD 973 million, versus SGD 789 million in the fourth quarter and SGD 856 million in the year-ago period. The year-over-year improvement was due to lower allowances for nonperforming assets, as these were largely steady. Our narrow economic moat rating on OCBC is reaffirmed, underpinned by the bank's cost advantage in low deposit funding. The Singapore-dollar-denominated deposit base was stable but we estimate market share slipped slightly to 15.7% from 16%. We are not concerned, as the Singapore dollar liquidity position remains high, with the loan/deposit ratio at 88.2%, despite a 220-basis-point increase on the prior quarter. The strong deposit base also allows the bank to raise funds cheaply in the capital markets, reflected in a five-year EUR 500 million covered bonds issue in late March at a fixed interest rate of 25 basis points.The result does not alter our estimates for OCBC or our fair value estimate of SGD 12. Our fair value estimate remains the highest among consensus, and OCBC remains our preferred pick between the three Singapore banks on valuation grounds. The three Singaporean banks have outperformed the Strait Times Index in the year to date, particularly at the end of April ahead of their first-quarter results, and their respective discounts to our fair value estimates have narrowed sharply over the past year. OCBC is trading at a 13% discount to our fair value estimate of SGD 12, while peers <a href="https://www.smartkarma.com/entities/22" target="_blank" data-smartkarma-citation="entities:22:1">DBS Group Holdings Ltd (DBS SP)</a> and <a href="https://www.smartkarma.com/entities/113" target="_blank" data-smartkarma-citation="entities:113:1">United Overseas Bank Ltd (UOB SP)</a>, or UOB, are trading on 8% and 2.3% discounts to their respective fair value estimates.Our thesis for the Singaporean banks continues to play out. While we saw nonperforming assets in the oil and gas sector as a concern, this was more than factored into the bank's share price, with all three banks trading on significant discount to their respective book values last year. Considering the banks' still-healthy net profits, ranging from SGD 3 billion to SGD 4.2 billion in 2016, there was a considerable cushion, even if additional allowance was needed to cover rising nonperforming assets. We did not expect the loans to impair the banks' books and its book value to reverse. Furthermore, all three banks remain well provisioned with solid capital positions.Analyst: Michael Wu, CAIA

Oversea Chinese Banking Corp. Limited (OCBC SP), or OCBC, bounced back from a weak fourth quarter to post a much stronger first-quarter 2017 result. Net profit was SGD 973 million, versus SGD 789 million in the fourth quarter and SGD 856 million in the year-ago period. The year-over-year improvement was due to lower allowances for nonperforming assets, as these were largely steady. Our narrow economic moat rating on OCBC is reaffirmed, underpinned by the bank's cost advantage in low deposit funding. The Singapore-dollar-denominated deposit base was stable but we estimate market share slipped slightly to 15.7% from 16%. We are not concerned, as the Singapore dollar liquidity position remains high, with the loan/deposit ratio at 88.2%, despite a 220-basis-point increase on the prior quarter. The strong deposit base also allows the bank to raise funds cheaply in the capital markets, reflected in a five-year EUR 500 million covered bonds issue in late March at a fixed interest rate of 25 basis points.The result does not alter our estimates for OCBC or our fair value estimate of SGD 12. Our fair value estimate remains the highest among consensus, and OCBC remains our preferred pick between the three Singapore banks on valuation grounds. The three Singaporean banks have outperformed the Strait Times Index in the year to date, particularly at the end of April ahead of their first-quarter results, and their respective discounts to our fair value estimates have narrowed sharply over the past year. OCBC is trading at a 13% discount to our fair value estimate of SGD 12, while peers DBS Group Holdings Ltd (DBS SP) and United Overseas Bank Ltd (UOB SP), or UOB, are trading on 8% and 2.3% discounts to their respective fair value estimates.Our thesis for the Singaporean banks continues to play out. While we saw nonperforming assets in the oil and gas sector as a concern, this was more than factored into the bank's share price, with all three banks trading on significant discount to their respective book values last year. Considering the banks' still-healthy net profits, ranging from SGD 3 billion to SGD 4.2 billion in 2016, there was a considerable cushion, even if additional allowance was needed to cover rising nonperforming assets. We did not expect the loans to impair the banks' books and its book value to reverse. Furthermore, all three banks remain well provisioned with solid capital positions.Analyst: Michael Wu, CAIA

OCBC Bounces Back With Stronger 1Q Result; FVE of SGD 12 Unchanged