OCBC's 3QFY13 net profit of SGD759m (+5% y-o-y, ex-divestment gains; +27% q-oq) was in line with our and consensus expectations, with  the  9MFY13 net profit of SGD2.05bn (-5% y-o-y, based on 9MFY12 core net profit) accounting for 76.5-77.5% of our and consensus full-year estimates. 3QFY13 net interest income grew by a decent  4% y-o-y  and  2% q-o-q, underpinned by  a  loan expansion  of 16% y-o-y/2% q-o-q. NIM was  broadly  stable q-o-q at 1.63% (-1bp q-o-q)  but  down  12bps y-o-y,  which  OCBC  attributed  to the  low  interest  rate environment and dilution from lower-yielding mortgages.

The group's  3QFY13 non-interest income  rebounded 29% q-o-q (+3% y-o-y)  mainly on  higher  contribution  from  life  assurance  (SGD240m  vs.  2QFY13:  SGD16m, 3QFY12:  SGD190m).  GE's  non-participating  fund  benefited  from  MTM  gains following  the  US  Fed's  decision  to  delay  QE  tapering.  The  3QFY13  fee  income  of SGD352m (+1% q-o-q; +16% y-o-y)  was a new quarterly high for OCBC,  but trading income  slid  48% q-o-q/68% y-o-y  given  the  tougher market conditions. Overall, noninterest  income  contribution  improved  q-o-q  to  44.3%  from  38.7%  in  2QFY13 (3QFY12: 44.4%).

Overheads for the quarter were well-contained (-5% q-o-q; -1% y-o-y), resulting in the cost-to-income  ratio  (CIR)  declining  to  38.8%  (3QFY12:  40.3%;  2QFY13:  45.8%). The q-o-q drop in overheads was due to a combination of lower staff incentive-related costs  and  lower  insurance-related  expenses,  while  the  y-o-y  drop  was  a  result  of lower insurance-related costs. Loan  allowances  trended  higher  in  3QFY13  (SGD94m  vs  2QFY13:  SGD83m; 3QFY12: SGD70m). The q-o-q rise mainly stemmed from higher specific allowances for the ex-Singapore and Malaysia portfolio,  but portfolio allowances were lower due to  a  slowdown  in  loan  growth.  Y-o-y,  the  rise  was  due  to both  higher specific and portfolio allowances.  Specific allowance charge-off rate  (annualised) stood at  10bps (3QFY12: 7bps; 2QFY13: 3bps).

As expected, loan growth momentum eased to +2% q-o-q (+16% y-o-y) vs +7% q-o-q (+15% y-o-y)  in 2QFY13.  With annualised growth at 16.5%,  OCBC appears likely to end the year ahead of  the  high-single digit to low double-digit growth  guided earlier. The  q-o-q  growth  was  led  by  trade  and  housing  loans,  but  corporate  lending  in Singapore softened.

Meanwhile, total customer deposits expanded by a  quicker 3% q-o-q  pace  (+15% yo-y),  led  by  fixed  and  other  deposits ,  but  current  account  and  savings  account (CASA)  deposits grew by a slower 1% q-o-q pace (+20% y-o-y).  This resulted in the group's loan-to-deposit ratio (LDR) dipping q-o-q to 88.4% from 89% at end-2QFY13, while CASA ratio eased to 49.3% from 50.1% at end-June 2013. The quarter also saw OCBC build up USD liquidity  given the strong demand for trade financing. USD deposits jumped 10% q-o-q (+48% y-o-y), resulting in  the  USD LDR falling to 110% from 116% a quarter ago. Meanwhile,  SGD LDR eased slightly to 83.9% from  84.5% at end-June 2013.

Absolute  gross  non-performing  loans  (NPLs)  rose  14%  q-o-q  and  12%  y-o-y, resulting  in  an  uptick  in  gross  NPL  ratio  to  0.8%  from  0.7%  at  end-2QFY13  (end-3QFY12: 0.84%). The rise in absolute gross NPL was largely from Greater China and Malaysia,  and  was  related  to  the  manufacturing  and  transportation  sectors.  There was  also  a  slight  increase  in  housing  loan  delinquency.  Not  surprisingly,  a considerable portion of the briefing  focused  on asset quality. However,  management did not appear overly-concerned with the rise in absolute gross NPL as asset quality, while  coming off  at  exceptionally low levels,  generally remained  benign. OCBC also guided  for  normalised  gross  NPL  ratios  of  around  0.9-1%.  Cumulative  allowances stood at 130% of total non-performing assets (NPAs), down slightly from 144% as at 30 June 2013.

Finally,  OCBC  disclosed  that  its  Basel  III  CET-1/Tier  1/total  capital  ratios  stood  at 14.3%/14.3%/16.1%  respectively  as  at  end-Sept  2013,  down  about  60-70bps  from the  end-June  2013  level  due to  redemption of its SGD1bn preference shares in July 2013.

For 2014, OCBC is guiding for loan growth of high single digit. We believe this slower growth guidance  vis-à-vis 2013  is partly  in response to  the  various  property cooling measures  introduced  by  the  MAS.  Already,  OCBC  has  seen  a  30%  y-o-y  drop  in residential  mortgage  applications  and  thinks  that  the  impact  on  loan  growth  would start to be felt in 2H2014.  Management sees some pressure on funding cost (mainly fixed  deposits)  but  said  that  the  banking  group  will  still  benefit  when  interest  rates start to rise due to its high CASA proportion.

OCBC remains open to potential M&A activities, especially if these involve any of  the group's  four key markets  of  Singapore, Malaysia, Indonesia and Greater China.  As Hong Kong fits in with its Greater China strategy, the group will expand its operations there. This unit  currently focuses on corporate banking and retail banking via Bank of Singapore.

The  risks  include:  i)  slower-than-expected  loans  growth,  ii)  weaker-than-expected NIMs, iii) weaker-than-expected capital market activities,  iv) a deterioration in asset quality, and v) adverse impact from rising bond yields on its securities portfolio.

We keep our FY13 earnings forecasts unchanged. However, with credit cost still low, albeit on a rising trend, we believe our previous FY14 overall credit cost assumption of 34bps was too conservative. We cut this to 21bps, which accordingly lifts our FY14 net profit forecast by 6%.

We raise our FV to SGD10.90 from SGD10.60 after rolling forward our valuation base year  to  end-2014  (previously  June  2014).  There  is  no  change  to  our  target  P/BV multiple  of  1.45x.  The  OCBC's  stronger  profitability  was  largely  due  to  MTM  gains from the insurance unit, while the underlying profitability of its banking operations was more muted. We continue to expect earnings volatility at the insurance unit given that the QE tapering is just a matter of time. Also, as we deem the stock's valuation not as attractive as its peers', we maintain our Neutral call.

Company Profile
OCBC is the third-largest Singapore bank by loan size. Besides Singapore, it has significant operations in Malaysia and Indonesia.

Source: OSK