OCBC

DBS Group Research, May 2

NET interest margins (NIM) remained under pressure as expected, from lower asset yields, reduced gapping opportunities and mortgage re-pricing from the previous pipeline. Non-interest income was driven by brokerage and wealth management, but offset by lower insurance contribution and trading gains.

Great Eastern recorded a decline in new business embedded value as certain accident and health products were deliberately held back in anticipation of revisions to the CPF Medishield plans; sales have normalised from March. Provisions were at its lowest level with credit cost of hardly one basis point.

During the analyst briefing, focus was centred on prospects on NIM and Basel III capital ratios. NIM compression will remain a feature in 2013 and is guided to fall by mid-to-high single digits (in bps) y-o-y (Q4 2012 NIM: 1.7 per cent). NIM in Singapore will remain under pressure mainly due to mortgage re-pricing, but operations in Malaysia and Indonesia could ease NIM declines. OCBC hinted that core equity tier-1 CAR (capital adequacy ratio) under the fully loaded Basel III requirements would be close to 12 per cent. On a transitional basis, core equity tier-1 CAR stood at 16.2 per cent.

Downgrade to "hold" on valuations; target price is unchanged at $11.50. OCBC has been the best-performing Singapore bank YTD (+12 per cent). Current levels reflect its positives in our view.

Although there is limited downside risk, we struggle to find near-term catalysts, prompting us to downgrade our call. Meantime, we believe the area that OCBC will continue to differentiate from its peers is its wealth management and insurance franchises. OCBC still remains our preferred pick over UOB despite our downgrade.

HOLD