Friday, May 8, 2009

OCBC Buy - DBS

Strong core banking operations

• 1Q09 net profit exceeded expectations, earnings driven by higher contribution from insurance, lower expenses and lower provisions
• GEH surprised on the upside, but bulk of contribution came from regulatory changes
• Maintain Buy but raised TP to S$7.60.

Robust core banking operations. 1Q09 net profit grew 19% yo- y and 118% q-o-q to S$545m, due to strong insurance income, lower expenses, and lower provisions. NIM fell 5bps to 2.4% due to smaller gapping profits. Meanwhile, loans contracted 1% q-oq. Excluding GEH’s S$197m contribution to in 1Q09, core operating profit grew 36% q-o-q on higher forex and trading income. Expenses fell in line with cost containment measures and cash grants from the Job Credit Scheme. Specific provisions were lower q-o-q, but it booked additional S$94m provision to fully cover its corporate CDOs exposure. NPL ratio inched up to 1.8% from 1.5% last quarter, while absolute NPLs rose 20% with new NPLs largely from Greater China, Indonesia and Malaysia, and comprising mainly corporate and middle-market loans in the manufacturing, building & construction and general commerce sectors. Capital ratios remained strong at 15.1% Tier-1 CAR and 15.8% Total CAR.

Expect NIMs to hold up, loan growth to pick up. As loans continue to be re-priced at higher spreads, we expect NIMs to remain strong this year. Loan growth should be supported by SME loans from the SPRING scheme, coupled with refinancing activity by corporates. We are retaining our 6% loan growth assumption and earnings estimates for now.

Maintain Buy; TP raised to S$7.60. Our target price is revised to S$7.60 as we roll forward our valuation window to FY10F based on the Gordon Growth Model. The S$7.60 target price implies 1.6x FY10 P/BV, which is normalised mid-cycle multiple. We continue to like OCBC for its strong capital position, sustainable absolute dividends, and its presence in Malaysia, especially in Islamic banking.

1 comment:

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