OCBC

Kim Eng on 21 Feb 2012

Sell maintained. While 2011 earnings were flat YoY, underlying trends were commendable, with healthy topline growth (investment income aside), cost containment and growing regional contributions (41% of group pretax with 29% of group pretax from OCBC Malaysia). However, valuations at this stage are not enticing with the stock trading at a prospective 2012 P/BV of 1.3x for a relatively low prospective 2012 ROE of 10.9%. Our target price of $7.50 tags on a P/BV of 1.1x to the stock.


2011 results within expectations. OCBC’s 2011 core net profit of $2.28b (+0.7% YoY) was within our and consensus expectations. Net interest income rose 15.7% YoY led by loan growth of 27% YoY, offset in part by a 12bps compression in net interest margins (NIM). Fee income was up a healthy 14.3% YoY, but lower trading and investment income were a drag on overall earnings.


The positives. NIMs stabilised in 4Q and costs continued to be well-contained, up just 1.5% QoQ. Moreover, wealth management income would have risen 13% YoY if not for lower investment income contributions from Great Eastern (GE). GE’s underlying business nevertheless remains healthy, with weighted new sales up 10% YoY.


The negatives. Non-performing assets (NPAs) jumped 24% QoQ in 4Q as management reclassified some loans as substandard, as part of a prudent review process. Management stressed that there is no systemic risk in any particular industry or geography. The reclassified loans carry no provisions because they are expected to be fully repaid.


Marginally higher forecasts. Guidance is for corporate loan growth to taper off to the low teens in 2012, but retail loan demand is expected to remain robust, with a run rate in the high teens. We have modelled a marginal 3bps NIM compression for 2012, but are raising our loan growth assumption to 10.7% this year from 9.4% previously. Our earnings forecasts are marginally raised, by 2% for 2012 and 2013.