OCBC loan growth momentum slowing

Target price of S$8.30

Fair set of results, despite strong trading income. OCBC reported 4Q11 net profit of S$594m, above ours and consensus expectations. The above-expectations earnings was primarily due to 4Q11 net trading income gains of S$163m, versus 3Q11’s S$68m loss ie a difference of S$231m QoQ. We rate the results as fair, as the key variables of net interest margin and loan expansion are in-line. Target price of S$8.30 is derived from 1.3x 2012 book, a discount to the historical 1.54x due to the economic slowdown seen ahead. Given expectations of slower FY12 loan growth (versus FY11's), and continued narrow NIM, we see no catalyst driving share price and maintain our NEUTRAL recommendation.

Loan growth momentum slowing. NIM of 1.85% was unchanged from 3Q11, whilst loans expanded 4.5% QoQ (versus 3Q11’s 6.8%). These contributed to the 6% QoQ rise in net interest income. The strong 27% YoY loan growth led to FY11’s net interest income rising 16%. We forecast FY12 NIM of 1.90%, a 4 bps widening YoY. Our FY12 loan growth forecast is raised to 11%, from 8.5% previously, on the back of management guidance of strength in housing loans.

Slight increase in NPL ratio due to portfolio review. Provisions doubled QoQ, whilst NPL ratio of 0.9% was slightly higher than 3Q11’s 0.7%. This follows a comprehensive portfolio review in anticipation of a 2012 economic slowdown. We expect systemic deterioration in asset quality, and are assuming a FY12 NPL ratio of a higher 1.3%.

A final dividend of 15S¢ ps was declared, bringing FY11 total dividend to 30S¢ ps, unchanged from FY10. The script dividend scheme will not be applicable to the final dividend. We cut FY12F net profit by 2% to S$2.26b, due to higher loan loss allowances.


CIMB Target Price S$8.49

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Target price of $7.50

Sell maintained. While 2011 earnings were flat YoY, underlying trends were commendable, with healthy topline growth (investment income aside), cost containment and growing regional contributions (41% of group pretax with 29% of group pretax from OCBC Malaysia). However, valuations at this stage are not enticing with the stock trading at a prospective 2012 P/BV of 1.3x for a relatively low prospective 2012 ROE of 10.9%. Our target price of $7.50 tags on a P/BV of 1.1x to the stock.

2011 results within expectations. OCBC’s 2011 core net profit of $2.28b (+0.7% YoY) was within our and consensus expectations. Net interest income rose 15.7% YoY led by loan growth of 27% YoY, offset in part by a 12bps compression in net interest margins (NIM). Fee income was up a healthy 14.3% YoY, but lower trading and investment income were a drag on overall earnings.

The positives. NIMs stabilised in 4Q and costs continued to be well-contained, up just 1.5% QoQ. Moreover, wealth management income would have risen 13% YoY if not for lower investment income contributions from Great Eastern (GE). GE’s underlying business nevertheless remains healthy, with weighted new sales up 10% YoY.
The negatives. Non-performing assets (NPAs) jumped 24% QoQ in 4Q as management reclassified some loans as substandard, as part of a prudent review process. Management stressed that there is no systemic risk in any particular industry or geography. The reclassified loans carry no provisions because they are expected to be fully repaid.

Marginally higher forecasts. Guidance is for corporate loan growth to taper off to the low teens in 2012, but retail loan demand is expected to remain robust, with a run rate in the high teens. We have modelled a marginal 3bps NIM compression for 2012, but are raising our loan growth assumption to 10.7% this year from 9.4% previously. Our earnings forecasts are marginally raised, by 2% for 2012 and 2013.

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