OCBC - 1Q09 net profit S$545m, boosted by S$175m non-recurring profit

Recurring profit S$370m (vs. Citi S$300m): Stronger than expected non- interest income (insurance and FX/securities trading income) drove a 48%qoq rise in net profit (4Q: S$250m), plus fairly robust net interest income and lower operating costs. Provisions charges at an annualized 99bps of loans reflected a conservative stance to fully write down legacy CDOs. Life insurance enjoyed non-recurring profits of S$201m (S$175m net of tax) largely due to the adoption of a risk-based capital framework in the Malaysia business.

1Q09 recurring profit S$370bn (4Q: S$250m), +48%qoq: 1Q09 NII S$740m - 6%qoq: Loans -1%qoq, NIM 242bps (4Q: 247bps). Loan-to-deposit spread 2.79% (4Q: 2.91%), LDR 87%. Non-II S$406m (excluding non-recurring profit S$201m), fees S$155m (-3%qoq), recurring insurance earnings S$96m, other income S$155m (4Q: loss S$46m) on turnaround in FX/dealing. Costs S$413m -11%qoq, lower staff expenses (helped by job credit grants). Provisions S$197m (4Q: S$244m). NPL ratio 2%, coverage c100%. Tier-1 ratio 15.2%. 1Q09 annualized EPS S$0.68 (recurring profit EPS S$0.46 (cash EPS S$0.48)), BPS S$4.75.

1Q09 Provisions S$197m (annualized 99bps of loans): S$88m specific loan provisions, S$2m general, S$94m allowances for corporate CDOs, plus S$13m against other debt securities.

Total CDO portfolio S$305m (4Q S$453m): ABS CDO portfolio S$100m is 100% provided. The S$205m corporate CDO portfolio has cumulative allowances of S$136m, and including S$69m of cumulative mark-to-market losses previously recognized to the income statement, in effect full provision has been made. Credit rating of total CDO portfolio as of Mar-09: A: 2%, BB: 20%, CCC: 45%, CC: 33%.

Valuation now at 1.4x P/B post share rally: OCBC surprised the market with a strong 1Q09 result, up 48%qoq even excluding the large one-time earnings from its insurance business. Robust margins, better-than-expected FX/dealing income and good cost control lifted the bottom line, even though management conservatively decided to make provisions for the rest of its corporate CDO book. At 1.4x P/B there remains a valuation gap to OCBC's P/B cycle mean, with possible upside to consensus. Detailed management briefing highlights are on page 4 of this report.

Outlook: Mgmt remains very cautious on the economic outlook but still sees opportunities for mid-single digit loan growth given govt-assisted loan schemes, refinancing opportunities and the scaling back from foreign banks. While it is difficult to predict NPL growth, mgmt has stressed the importance of being proactive in identifying problems and mitigating losses. Full provision for CDOs will mean no further burden to earnings. Although insurance operations had a poor quarter, mgmt seemed confident of improvement later in the year.

1Q09 recurring profit S$370bn (4Q: S$250m), +48%qoq: 1Q09 NII S$740m -6%qoq: Loans -1%qoq, NIM 242bps (4Q: 247bps). Loan-to-deposit spread 2.79% (4Q: 2.91%), LDR 87%. Non-II S$406m (excluding non-recurring profit S$201m), fees S$155m (-3%qoq), recurring insurance earnings S$96m, other income S$155m (4Q: loss S$46m) on turnaround in FX/dealing. Costs S$413m -11%qoq, lower staff expenses (job credit grants). Provisions S$197m (4Q: S$244m). NPL ratio 2%, coverage c100%. Tier-1 ratio 15.2%. 1Q09 EPS S$0.68 (recurring profit EPS S$0.46 (cash EPS S$0.48)), BPS S$4.75.

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