OCBC

CIMB on 2 Aug 2012

OCBC beat our and market expectations on low provisions. A positive was strong fee performance but that came from various fee streams instead of OCBC-specific franchise strength (wealth management and insurance). We take this as a positive read-through for the other banks.

Q2 2012 profits ($648 million) came in above our forecast ($580 million) and the consensus forecast ($616 million), mostly on lower-than-expected loan provisions. Pre-provision operating profit was slightly below our estimate as revenue was in line and overheads rose higher than forecast. Maintain "neutral" with an unchanged target price of $9.82 (Gordon growth model-based, 1.35x 2012 P/B).

Fee income ($317 million, up 16 per cent q-o-q) was strong as loan-related, trade-related fees and investment banking did well. We believe these are positive signs for the rest of the banks.

We have been arguing that fee income is the key revenue stream for the Singapore banks to spring positive surprises. Notably, the OCBC franchise-specific fees (insurance, wealth management) did not grow that much. Strong fees offset weak net interest income and trading. Its non-performing loan ratio improved (Q2: 0.9 per cent, Q1: 1.0 per cent). Provisions were lower than expected (specific provisions: 4 basis points, general provisions: 8 basis points) and were the main reason profits were ahead of forecasts; we think it is hard to sustain such levels of provisioning as the macro environment sours. H1 2012 dividend per share (16 cents) is higher than last year's 15 cents.

The key negative was a net interest margin decline of a whopping 9 basis points (to 1.77 per cent). We think the other two banks will show similar falls - but more muted, we hope. Margins dipped on increased liquidity as monies sought safe havens. OCBC's Q2 loans were up 2.8 per cent q-o-q; customer deposits were up 1.8 per cent but deposits from banks were up 9.3 per cent. Other negatives: overheads growth (up 6 per cent q-o-q) on higher staff costs, and less trading than expected.

Although above estimates, the outperformance was mostly from low provisions and we do not deem it impressive. We note the strong fee trends and expect peers to show similar performance.