OCBC

DBS Group Research on 20 Feb 2012

Q4 2011 earnings were in line, driven by the reversal of trading loss but were mostly offset by lower insurance contribution. Fees and commissions were weaker across the board.

Wealth management income was affected by weakness in Great Eastern, but we understand that the traction in Bank of Singapore (BoS) remained strong. BoS' assets under management (AUM) grew 20 per cent y-o-y to US$32 billion. FY2011 net profit (excluding $39 million divestment gain from properties) stood at $2,280 million (+1 per cent y-o-y). All income statement lines improved y-o-y but non-interest income (NIM) was dragged by weak trading income.

NIM was flat q-o-q but fell 11 basis points y-o-y, attributed to the low interest rate environment, low yielding trade related loans and competition from the mortgage segment. Loans grew 5 per cent q-o-q/ 27 per cent y-o-y, while deposits grew 6 per cent q-o-q/25 per cent y-o-y. Loan-to-deposit ratio tapered to 86 per cent from 88 per cent q-o-q but US-dollar loan-to-deposit ratio remained high at 163 per cent (Q3 2011: 166 per cent).

Scrip dividends are not applicable to the final DPS as management views that current capital is strong enough to meet Basel III requirements.

NPLs rose after a comprehensive review, which led to reclassification of some loans into the substandard category in view of the weaker operating environment in 2012. These loans are still performing and no additional provision has been made, as they are well collateralized. Loan loss coverage dipped to 107 per cent from 130 per cent.

NIM should be stable in 2012 given the mixed trends across OCBC's key operating markets (soft in Singapore, stable in Malaysia, lower in Indonesia, higher in China). Consumer loans remain strong but corporate loans will moderate in 2012. Non-interest income may remain volatile but OCBC plans to leverage on customer flows (31 per cent of total treasury income, from 26 per cent).

No specific regional profit mix has been stipulated but growth is expected to be broad-based across key operating markets.

Maintain 'buy' with TP tweaked to $10.20 (from $10.00) based on the Gordon Growth Model with the following assumptions: 12.5 per cent ROE, 5 per cent growth and 9.6 per cent cost of equity (from 10 per cent), implying 1.6 times FY2012 P/BV.
BUY