Strong  YoY  net  profit  growth.  OCBC  reported  3Q12  net  profit  of  S$1.85b, slightly  higher  than  consensus  expectation  of  S$1.76b.  Excluding  divestment gains,  core  net profit  of S$724m was  up  41%  YoY, driven by higher  net  interest income,  improved  trading  performance  and  increased  life  assurance  profit.  The S$724m  represents  28%  of  our  2012  core  net  profit  forecast.  Whilst  the  results offer some positive surprise, the key drivers of higher life assurance income and trading  income  are  mainly  market-pricing-related  (eg  higher  life  assurance income  was  mainly  due  to  non-participating  fund)  and  may  not  be  sustainable.  Maintain NEUTRAL. Our target price of S$8.80 is pegged to 1.25x 2013 book, a discount to the historical average of 1.51x. 

Net interest income sequential growth was unexciting, with NIM squeeze an issue. Similar to the other two banks, OCBC recorded a sequential NIM squeeze. NIM of 1.75% is 2 bps narrower QoQ, with asset yields down 7 bps QoQ.  Loans expanded  a  mild  1%  QoQ,  with  housing  loan  growth  offsetted  by  general commerce loans weakness. All these contributed to net interest income rising 1% sequentially. However, there was  YoY  strength in net interest income due to the 8%  YoY  loan  growth.  Management  expects  NIM  squeeze  to  persist  going forward.

Life assurance  and trading drove core non-interest income.   Excluding one-time gains, non-interest income was up 27% (or S$158m) sequentially, due to life assurance  profit  rising  167%  (or  S$119m),  and  net  trading  income  up  95%  (or S$69m). Fees and commissions fell 5% sequentially.

Post  results  release,  we  raised  our  2012F  net  profit  by  4%  to  S$3.95b  as  we lower loan  loss provisions  and raise trading income. Our 2013F net profit is also raised by 7% to S$2.54b, as we reduce provision expectations.  

Source: OSK