• We were more surprised by OCBC (SGX:O39)’s DPS of S$0.25 (1H18: S$0.20) than its 3bp NIM expansion. Expect positive share price movement today from this.
• 2Q net profit of S$1.22bn is slightly above our forecast of S$1.2bn mainly due to NIM and stronger wealth income. Trading income dipped 32% q-o-q from 1Q19’s high.
• Maintain HOLD with GGM-based Target Price of S$12.59 (implied P/BV: 1.3x, ROE: 11.3%).

Slightly Above Expectations

• OCBC’s 2Q19 net profit of S$1.22bn was a slight S$1.2bn above our estimate, and 5% above Bloomberg consensus’ S$1.16bn expectation.
• 1H19 net profit formed 53%/52% of our/Bloomberg consensus' full-year forecasts of S$4.64bn/S$4.72bn.
• 2Q19 PPOP was S$1.47bn (-7% q-o-q, +2% y-o-y); total income dipped 2% q-o-q.

Better NIM, Stronger Loan Growth

• 2Q19 NIM rose 3bp to 1.79% (1Q19: +4bp to 1.76%) – asset yields held up well on the back of some release in expensive fixed deposits.
  • OCBC Wing Hang's NIM: +12bp to 1.72%
  • OCBC Malaysia's NIM: -4bp to 2.05%
  • OCBC NISP's NIM: +20bp to 4.09%.
• Loan growth was strong at +1.6% q-o-q in 2Q19 (1Q19: +0.3% q-o-q); we expected +1.0% q-o-q. OCBC had guided for low to mid single-digit growth in FY19. Most of the growth in 2Q19 came from Singapore and other Asia Pacific. Loans to Greater China picked up to +1.2% q-o-q after having contracted for the past two quarters.

Dip in Trading Income Offset by Higher Wealth Management Income

• Non-II declined 10% q-o-q/+0.6% y-o-y on the back of weaker trading income (-32% q-o-q, +0.5% y-o-y). The latter was attributable to more normalised mark-to-market (MTM) gains on securities held by subsidiary Great Eastern Holdings (SGX:G07)'s shareholders’ funds from 1Q19’s elevated levels. Sustained wealth management income (+10%, +16% y-o-y) offset some of this weakness.
• Insurance income was softer at S$188m (-32% q-o-q, -20% y-o-y). Great Eastern’s lower S$137m (1Q19: S$290m) contribution to the group was due to weaker total weighted new sales of S$300m (-9% q-o-q) and flattish new business embedded value (NBEV) of S$148m in 2Q19.
• Cost-to-income (CTI) ratio increased to 44% in 2Q19 (1Q19: 40.9%, FY18: 43.4%) on the back of higher opex (+5% q-o-q, +11% y-o-y). Staff costs rose 5% q-o-q and 13% y-o-y, while other opex increased 5% q-o-q and 9% y-o-y.

Lower Credit Costs of 17bp

• OCBC recorded credit costs of 17bp in 2Q19, lower than the 38bp charged off in 1Q19 due to additional provisions for its existing support vessels and services (OSV) sector.
• New NPLs in the quarter came from Indonesia – likely to be a steel account.

Source: CGS-CIMB Research - 2 Aug 2019