OCBC reported 1QFY13 net profit of SGD696m (-12% y-o-y, based on core 1QFY12 net profit; +5% q-o-q). While this was 4% and 3.5% ahead of our and consensus full-year estimates respectively, when annualised, we consider the results to be within expectations. Annualised pre-provision operating profit was 5% below our estimates, but this was more than offset by low loan allowances, which we do not think is sustainable despite OCBC's sound asset quality.

Operating income was down 12% y-o-y and 5% q-o-q due to weaker net interest and non-interest income. 1QFY13 net interest income (-4% y-o-y, -1% q-o-q) was impacted by NIM pressure (-22bps y-o-y; -6bps q-o-q) due to lower asset yields resulting from the low interest rate environment, reduced gapping opportunities and re-pricing of existing housing loans in Singapore. These, however, were cushioned by decent loan growth (+10% y-o-y; +3% q-o-q).

Management expects the re-pricing of the mortgage book to continue for another 12-18 months, but this would be cushioned by the continued focus on growing contribution from overseas. NIMs in Malaysia and Indonesia are currently around 2.2% and 4% respectively, which would help compensate for the margin pressure faced domestically. On the whole, OCBC thinks NIM has likely bottomed out for the year. Finally, OCBC thinks any rate increase is now likely to be pushed back following Japan's aggressive monetary easing,

1QFY13 non-interest income was also softer (-15% y-o-y, ex-divestment gains; -11% q-o-q) mainly due to weaker trading income (-65% y-o-y; -59% q-o-q) and lower profit from life assurance (-19% y-o-y; -15% q-o-q) due to lower mark-to-market (mtm) investment gains in GEH's non-participating funds. Fee income (+15% y-o-y; +4 q-o-q), however, was a bright spot, thanks mainly to wealth management. The three main markets where OCBC is seeing good traction in wealth management are Singapore, Malaysia and Indonesia. Overall, non-interest income contribution slipped to 42.6% in 1QFY13 vs. 1QFY12: 45.4%; 4QFY12: 45.1%.

Overheads were generally under control, down 7% q-o-q with lower costs across the board but up 8% y-o-y due to higher personnel cost (mainly in Malaysia and Indonesia). Management guided for expenses to pick up ahead as IT investments will be ramped up, but overall, the rise should be capped at around high single digits. 1QFY13 cost-to-income ratio (CIR) stood at 42.3% as compared to 35.9% in 1QFY12 (4QFY12: 43.1%).

Loan allowances were a bright spot in 1QFY13, at just SGD21m (-79% y-o-y; -70% q-o-q). Specific allowances stood at a mere 1bp (1QFY12: 13bps; 4QFY12: 10bps) due to lower allowances and higher recoveries while portfolio allowances was down around 60% y-o-y and q-o-q. According to management, asset quality remains benign with no systemic issues noted thus far. Thus, despite the weaker pre-provision operating profit (-18% y-o-y, ex-divestment gains; -4% q-o-q), the low loan allowances helped support 1QFY13 profitability.

Annualised gross loan growth was 12% (+10% y-o-y), ahead of the high single-digit guidance and our 7% assumption. The latest round of cooling measures for the residential property market is only expected to impact mortgage originations from 2H13, leading to slower loan growth. Hence, OCBC maintained their loan growth guidance.

Y-o-Y growth was led by housing loans and loans to building and construction while by geography, growth was led by the local and Malaysian operations. Meanwhile, total customer deposits expanded by an annualised pace of 9% (+7% y-o-y), resulting in the group LDR inching up q-o-q to 87% from 86.2% at end-2012. This, however, was still within the 85-90% comfort zone. More importantly, CASA growth was a robust 13% (+20% y-o-y), annualised, which helped push group CASA ratio to 51% at end-Mar 2013 (end-2012: 50.6%). The improvement came mainly from Singapore and management thinks the CASA ratio can be sustained ahead.

Asset quality improved further with absolute gross NPLs down 5% q-o-q to SGD1.1bn while the gross NPL ratio improved to 0.7% from 0.8% as at end-2012 (end-Mar 2012: 1%). Cumulative allowances were 149% of total NPAs, up from 142% as at 31 Dec 2012. Generally, management is still comfortable with asset quality and has not noted any systemic issues. Finally, OCBC disclosed Basel III CET-1/Tier 1/Total capital ratios of 16.2%/16.2%/18.1% respectively. Tier-1 and Total capital ratios were 16.6% and 18.5% respectively as at end-2012, based on Basel II. The q-o-q drop was mainly due to higher risk weights for exposures to financial institutions, equities and OTC derivatives, cushioned by the full recognition of revaluation surplus on all AFS securities as CET-1.

The risks include: i) slower-than-expected loan growth; ii) weaker-than-expected NIMs; and iii) deterioration in asset quality.

No change to our earnings forecasts.

We have raised our fair value to SGD10.60 from SGD9.60, which takes into account the following: i) upgraded target 1-year forward P/BV multiple of 1.45x (1.35x previously). This is in lieu of the ample liquidity following easy monetary policies globally, which is positive for riskier assets; and ii) a roll-forward in our book value to June 2014, from Dec 2013. Despite the upgrade, the limited upside potential means that our Neutral remains unchanged.

 

Source: OSK