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.
Benefitting from surge in home sales. 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. 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 forecasts by 0.9% and 4.1% respectively. Maintain BUY. Our target price of S$9.15 is 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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