While GEH’s contribution surged near 3-fold in 2Q09 along with the sharp rebound in equity prices and improving fixed income portfolio, it remains a swing factor for OCBC. Into the 3rd quarter, a one-time provision charge for Greatlink Choice (GLC) products amounting to about $250m will be taken. This will directly affect OCBC’s 3Q09 earnings by near $218m. Despite the temporary set back, we view this positively in the long run as GEH regains customers’ goodwill ahead of its competitors.
Net interest income slid 4% qoq due to declining loans book (-2%) and narrowing net interest margins. Its loans book has seen weaknesses in the manufacturing and construction sectors, and is likely to remain weak amid the negative economic growth. We also see little catalysts for NIM expansion as its cost of funding is likely to have bottomed with SIBOR at all time lows. Rising competitive pressures will also limit NIM upside.
While specific allowances were halved, NPLs increased by 14%. The NPLs largely comprise of chunky accounts from the manufacturing and transport sectors, which are classified under the substandard category on the group’s conservative stance. Overall, asset quality remained sound as the inflow of new NPLs has generally slowed. The group maintained a strong Tier 1 ratio of 15.4%, highest among its peers.
We have increased our FY09 and FY10 earnings estimates by 5% and 8% respectively to reflect higher fee based income and lower provisions. We have also taken into account the provision charge on GLC for 3Q. Our target price is raised to $8.80 as we rolled forward to the FY10 PBV of 1.62x (1.53x previously) in line with the sector average. Maintain Hold in view of the lack in earnings catalysts and high earnings volatility.
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