Oversea-Chinese Banking Corporation

DMG & PARTNERS RESEARCH on 16 July 2012

OCBC will release its results on Aug 2, 2012 before trading hours. We are forecasting Q2 2012 net profit of $630 million, down from Q1 2012's $832 million.

We do not expect the exceptionally strong Q1 2012 life assurance income (over four times that of Q4 2011) and robust Q1 2012 net trading income (double the historical average) to be sustained in Q2 2012.

Loan growth may also be weak following Q1's sequential loan contraction. We see no catalyst driving OCBC's share price and maintain our "neutral" recommendation with TP of $8.30, pegged to 1.3x FY12 P/B.

MAS (Monetary Authority of Singapore) data showed Singapore's systemic loan growth of 0.6 per cent m-o-m for April and 2.2 per cent for May.

We do not believe the May loan growth strength will persist and expect a slower m-o-m loan growth pace for June.

In the case of OCBC, Q1 2012 loan contracted 0.4 per cent q-o-q due to a 6.8 per cent q-o-q contraction in general commerce loans. Q1 2012 OCBC US-dollar loans contracted 5.2 per cent q-o-q, due to a fall in US dollar loans to Chinese corporates for trade financing.

We believe the recent easing of monetary policy by People's Bank of China (PBOC), evident from the reserve requirement ratio cut starting from Dec 11 and lowering of policy rates by PBOC (in June and July 12), could lead to further weakness in lending to Chinese corporates. This may dampen OCBC's Q2 2012 loan growth.

Q1 2012's life assurance income of $221 million was more than quadruple of Q4 2011's $51 million, driven by improvement in Great Eastern Holding's non-participating fund.

The benchmark Straits Times Index (STI) level of 3,010 at end-March 2012 was 14 per cent higher q-o-q, which is a contributing factor to Q1 2012's strong life assurance income.

However, the STI level of 2,878 at end-June 12 was down 4 per cent q-o-q.

On a positive note, the fall in 10-year Singapore government bond yields (by 23 basis points q-o-q to end-June 2012's 1.59 per cent) has led to good gains from government bonds. Overall, we expect a sequentially weaker Q2 2012 life assurance income.

Maintain "neutral" with a target price of $8.30. 
NEUTRAL