OCBC - Lowest equity-fundraising risk

Despite persistently high loan-impairment charges, OCBC’s performance could prove the most resilient in the sector due to a recovery of its insurance business (we forecast the net profit from Great Eastern Holdings [GE SP, S$8.39, Not rated] to rebound to S$356m for FY09 [from S$272m for FY08] on an abatement of marked-to-market losses) and a steady performance from its banking subsidiaries in Malaysia and Indonesia.

With the highest Tier-1 ratio and management practically dismissing (in our opinion) the possibility of raising common equity, OCBC’s slight premium valuation to the sector is partly justified, in our opinion.

We do not believe the 4Q08 NIM of 2.47% (from 2.18% the previous quarter), is sustainable, due to one-time factors, and expect subdued results due to persistently high loan-related provisions. The insurance business offers potential to surprise positively.

OCBC’s shares trade above our zero-growth DDM value of S$4.31 (excluding the 2008 final dividend). We have assumed a CAPM-derived cost of equity of 6.58%. Our new target price is equivalent to 0.89x book (December 2008). The stock’s previous PBR troughs occurred in 2003 (1.04x) and 1998 (0.58x).

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