OCBC Bank

Kim Eng on 2 May 2014

• Like DBS, OCBC’s NIM also surprised on the upside on larger loan spreads and better gapping opportunities.
• Other notable trends: Strong loan traction, solid credit quality, ample liquidity (78.8% SGD LDR).
• Purchase of WHB remains a concern. Maintain HOLD with TP of SGD9.08, based on 1.24x FY14E P/BV.

Exceeds market expectations by a mile
OCBC’s 1Q14 core PATMI (excluding a one-off gain of SGD32m from the partial disposal of GEH’s stake in its China JV) rose 21.3% QoQ and 24.6% YoY to SGD867m, surpassing our and market expectations for SGD730m. The earnings surprise came from better-than-expected net interest margin (NIM), lower loan losses and larger-than-expected trading and investment income.

Key operating trends remain steadfast
Like DBS, OCBC also saw a strong rebound in NIM to 1.70% (+6bps QoQ, +6bps YoY), its highest in five quarters. The improvement was underpinned by larger loan spreads and higher income from money market activities and gapping opportunities. The strong asset quality kept loan losses low at SGD41m, far below our forecast of SGD80m. Despite a difficult fixed income market, OCBC managed to eke out a stronger-than-expected core trading and investment income of SGD151m (+65.9% QoQ, +42.5% YoY). Loan growth remained strong at 3% QoQ or 18% YoY.

Reiterate HOLD; WHB purchase an overhang
We leave our forecasts unchanged for now. The purchase of Wing Hang Bank (WHB) remains a share price overhang. While valuation appears cheap, we believe share price weakness will persist. Reiterate HOLD on OCBC with a TP of SGD9.08, based on 1.24x FY14E P/BV. For exposure, DBS remains our preferred pick.