OCBC

Kim Eng on 3 Aug 2012

HOLD. OCBC’s 2Q12 net profit of SGD648m (-22% QoQ, +12% YoY) was slightly (+4%) above our expectations and +7% above consensus, with the primary variance being more benign credit costs and higher investment banking income. Our forecasts are kept for 2012 (-4-5% for 2013-14) and with the stock trading at what we deem to be a fair prospective 2012 P/BV of 1.5x (12.2% ROE), our HOLD call is maintained with an unchanged target price of SGD8.80 (P/BV of 1.27x).

The positives include a) 2Q loan growth of 3Q QoQ, after stalling in 1Q12, b) robust fee income (+16% QoQ) driven by higher investment banking income and trade-related fees, and c) the decline in absolute NPLs, having risen over the past two quarters. Separately, the QoQ decline in earnings was very much anticipated with the normalization of trading income & investment gains from a high base in 1Q12.
On the flipside, the 9 bps QoQ compression in NIMs was larger than expected while annualized loan growth todate of just 5% trails management’s earlier low-teens growth guidance.

Toning down loan growth guidance. Management now guides for high single digit loan growth in 2012, which is achievable if 2Q (+3% QoQ) momentum is maintained. Singapore loan growth has thus far been healthy (annualized 12%) while Malaysia could see a pick-up (annualized 5% todate), given its comfortable LDR of just 81%.

Looking for some stability in 2H NIM. 2Q12 NIM compression was across the region. In Singapore, mortgage rates remain competitive while funding costs were impacted by senior debt raising exercises. Malaysia saw upward pressure on funding costs while Indonesia’s pressure was on loan yields. Management expects slightly lower if not stable NIMs in 2H, with potentially improved NIMs out of Malaysia on improved asset utilization and the launch of higher yielding products.