• OCBC's 3Q18 core net profit was S$1.25bn, 13.1% above our estimate. 9M18 net profit made up 75/77% of our/consensus’s FY18F forecasts.
• Net-interest-margin (NIM) rose 5bp to 1.72% while loan growth was healthy at 1.7% y-o-y. Credit costs were low at 8bp of loans.
• However, JAW was negative, translating into slightly higher Cost-To-Income (CTI) ratio of 42%.

NIM improved to 1.72% as the rise in funding costs eased

• OCBC’s Net-interest-margin (NIM) was up 5bp q-o-q to 1.72% as funding cost pressure moderated slightly. In 3Q18, asset yields rose 13bp (2Q18: +17bp) while funding costs increased a smaller 10bp (2Q18: +17bp). Note that the bank’s NIM had stayed flat at 1.67% over the past year.
• We expect NIM to gradually improve in the coming months as the effects of the gradual repricing of its mortgage portfolio kick in.

Non-II supported by dividends and trading income

• Non-Interest-Income (Non-II) was S$1.1bn in 3Q18 (+1.5% q-o-q, +6.2% y-o-y), mainly due to better dividend income (+77% q-o-q, +150% y-o-y) and better trading income (+10% q-o-q). 
• Wealth management income reduced slightly (-2.7% q-o-q, +5.9% y-o-y) due to weaker consumer sentiment.
• Net profit contribution from Great Eastern Holdings (SGX:G07) was lower at S$176m (-10.7% q-o-q, -9.3% y-o-y).

Cost-to-income ratio higher on the back of negative JAW

• Increased slightly to 42.0% (2Q18: 41.8%) mainly due to higher staff costs. This is in line with the guided Cost-To-Income (CTI) ratio of 40-45% in FY18.

Healthy loan growth; some contraction in deposits

• OCBC recorded net loan growth of 1.7% q-o-q in 3Q18, bringing YTD expansion to 8.3%; this is within management’s high single-digit guidance for FY18.
• Key regional drivers were Singapore (+1.4% q-o-q, +8.0% y-o-y) and Greater China (+1.1% q-o-q, +15.0% y-o-y).
• By industry, credit growth was contributed by building and construction (+25.7% q-o-q, +46.0% y-o-y) and transport, storage and communication (+24.4% q-o-q, +46.0% y-o-y).
• Loan-Deposit-Ratio (LDR) trended upwards to 88.5% in 3Q18 (2Q18: 85.9%) as the bank’s deposit base contracted 1.2% q-o-q.

Asset quality stable with low 8bp credit costs

• Asset quality was stable with Non-performing Assets (NPA) formation of S$338m or 53bp of loans in 3Q18 (2Q18: S$277m or 44bp of loans). Non-performing Loan (NPL) ratio was unchanged at 1.4%.
• Loan loss provisions were S$49m in 3Q18, translating into 8bp of loans (2Q18: 3bp). Impairment charges at these levels were still significantly lower than the quarterly average of 29bp in FY17.
• Annualised credit cost of 4bp in 9M18 was still below management’s guidance of 15-20bp in the medium term.

Strong capitalisation

• Fully-loaded Common-Equity Tier 1 (CET-1) capital ratio stood at 13.6% (2Q18: 13.2%) while Return-of-Equity (ROE) was unchanged at 12.6%.

Valuation and recommendation

• A potential re-rating catalyst is further pick-up in NIM while a downside risk is slower-than-expected loan growth in ASEAN markets.
• We maintain our ADD call and GGM-based (ROE: 11.8%) target price of S$14.00.