OCBC

Kim Eng on 14 May 2012

Hold maintained. Coming in at 32-34% of our full-year forecast and consensus, OCBC’s 1Q12 results were a clear beat, with upside surprise from the insurance division and investment income. We however remain wary of rising NPL trends. Our net profit forecasts are raised by 8-9% for 2012-13 while our TP is raised to SGD8.30 (2012 P/BV of 1.27x) from SGD8.00 (+4%) on higher 2012 ROE estimates of 12.2% (from 10.9% before).

1Q12 net profit jumped 32% YoY to SGD832m. Primary beat came from non-interest income and insurance income. Treasury income from customer flows rose 26% YoY, while net trading income jumped 98% YoY due to higher income from forex and gains from securities trading. GE, meanwhile, saw its life assurance profit increase 47% YoY on higher investment income from its non-participating fund. The offset, however, was that provisions were larger than expected.

Loan growth stalls. While Singapore loan growth was decent at 3% YTD or 12% annualized, overall loan growth was flat QoQ as the bank scaled back on USD trade financing lines and its Malaysian loan book contracted 1% QoQ. The overall pace of expansion todate has lagged management’s guidance of low teens growth.

NIM expansion less than peers. While NIM stabilized QoQ, the 1 bp improvement was less than the 3-4 bps for its peers, as its Malaysian operations saw NIMs contract 13 bps QoQ amid stalled loan growth. Deposits continued to expand, contributing to a significant decline in Malaysia’s loan/deposit ratio to 77% end-Mar from 87% end-Dec 11.

NPLs rise. The negative aspect this quarter is that NPLs rose in absolute and percentage terms to 1% from 0.9% end-Dec 11. This is despite what was supposed to have been a group-wide spring cleaning of its loan book in 4Q11, which contributed to a rise in NPLs back then. Malaysia saw its NPL ratio increase for the second quarter running to 3% from 2.1% as at end-4Q11. Consequently, the group’s credit charge rose to 27 bps in 1Q12 from 21 bps in 4Q11.