OCBC - NPL formation has slowed across key markets

Maintains stable net interest margin. Loans contracted 1.5% qoq to S$79.2b due to repayment of short-term loans and term loans by corporate customers (companies repaying loans after equity fund raising). The few areas of growth are general commerce (+3.5% qoq), housing loans (+0.5% qoq) and professionals & individuals (+0.8% qoq). In terms of geographical region, the contraction came from Singapore (-1.3% qoq) and China (-5.1% qoq). Total deposits expanded 4.5% qoq to S$96.6b, driven by savings deposits (+10.5% qoq) and current accounts (+8.2% qoq).

Net interest margin contracted from 2.42% in 1Q09 to 2.29% in 2Q09 due to the following: a) lower gapping income, and b) net interest margin for OCBC Malaysia declined from 2.46% in 1Q09 to 2.35% in 2Q09 after two rounds of cut in the Overnight Policy Rate. Net interest income grew 4.6% yoy to S$710m. Non-interest income better than expected. Fees & commissions grew 25.1% qoq to S$194m with growth from brokerage, wealth management, investment banking and loans-related activities. OCBC benefitted from positive sentiment in financial markets and higher volume of loans syndication and capital raising activities. Life insurance contributed income of S$125m, almost double that of 1Q09 if we exclude one-off items, driven by nonparticipating funds as a result of a rebound in the equity and bond markets.
OCBC recorded positive net trading income of S$61m due to foreign exchange activities. It also recorded gains of S$21m on disposal ofinvestment securities.

NPL formation has slowed. NPLs increased 14.3% qoq to S$1,628m due to the manufacturing, general commerce and transport & communications sectors. By geographical region, new NPLs came from the core Singapore and Malaysia markets. The increases in NPLs came from loans that were not overdue. We take this as a sign of conservative management in recognising NPLs early. In fact, NPLs in the doubtful and loss categories have declined. Management commented that the inflow of NPLs has slowed across key markets.

OCBC made specific provisions of S$44m and general provisions of S$5m in 2Q09, representing total provisions of 25bp on an annualised basis. This is lower than the 45bp in 1Q09 as the bulk of new NPLs were in the substandard category. OCBC also made allowance for investments in debt and equity securities amounting to S$57m. NPL coverage remains healthy at 97.1%.


OCBC is the prime beneficiary of buoyant sales for private residential properties. Approvals for housing loans doubled qoq in 2Q09. OCBC has so far approved S$600m of SME loans under the Special Risk-Sharing Initiative (SRI) administered by Spring Singapore.

OCBC is well capitalised with tier-1 capital adequacy ratio (CAR) at 15.4%. Core equity tier-1 is robust at 11.3% after stripping out preference shares. OCBC recognised gains of S$580m on available-for-sale financial assets, mainly for its investments in Bank of Ningbo and Fraser & Neave. Thus, NAV/share increased from S$4.75 as at Mar 09 to S$4.94 as at Jun 09. OCBC declared interim tax-exempt dividend of 14 cents/share, representing a payout of 44% on core net profit for 1H09.


We have raised our assumptions for loans growth to 1.6% for 2009 (previous: 2.6%) and 11.7% for 2010 (previous: 8.2%) to factor in increased demand from property developers and housing loans. We have revised our assumptions based on trends in NPL ratios over the last three quarters. We have assumed NPL ratio will hit 3.8% by end-10 (previous: 4.2%). Our earnings model has imputed allowance for credit losses of 80bp in 2H09 (previous: 95bp) and 60bp in 2010 (previous: 70bp). We have raised our 2009 and 2010 net profit forecast by 0.9% and 4.1% respectively.

BUY with target price of S$9.15 based on a P/B of 1.72x derived from the Gordon Growth Model (ROE: 12%, payout ratio: 48%, required return: 8% and constant growth: 4.5%).

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