OCBC beat consensus by 30%

OCBC reported Q2 net profit of S$466m versus our estimate of S$342m and consensus estimate of S$356m. The main difference was in provisioning, which came in significantly lower than projected despite the increase in non-performing loans (NPL). Management said, “the inflow of new NPLs has generally slowed across the Group's key markets as compared to 1Q09”. We believe this would be welcomed by the market.

OCBC’s fee and commission income was impressive with only a 4% decline YoY and a 25% increase QoQ. It was helped by stock broking, investment banking, and loan-related fees. However, in the core lending business, net interest margin was down 13bps sequentially due to lower gapping opportunity.

While the result beat expectations, we expect Q3 earnings to be muted because of one-off compensation to its insurance customers for the purchase of investmentlinked products that had CDOs. The one-off cost to OCBC is about S$218m, 14% of our full-year estimate.

We plan to revisit our estimates once all the Singaporean banks report their results. We derive our price target of S$8 by using the Gordon growth model; our main assumptions are ROE of 11.3%, COE of 7.6%, and terminal growth of 3%.

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