1Q09 core pre-provision profit rose 24% YoY on robust net interest income and trading profits. But core net profit fell 26% YoY to S$ 325mn as provisions rose dramatically. Still, core recurring earnings were ahead of expectations, accounting for 25% of Reuters consensus estimates and 29% of BAS-ML forecasts.
Gross NPL rose to 1.8% (Dec 08: 1.5%) on weakness from manufacturing and building & construction loans. Most of the weakness came from abroad, especially from Indonesia and China. Management revealed that the spike in NPLs came mainly from two loans in the building & construction segment. Although the borrowers are still meeting their debt servicing obligations, they were reclassified as NPLs as one of them breached a loan to value covenant while the other missed a repayment, which has already been recovered. Loan loss coverage remains strong at 112% (Dec 08: 129%).
We have set our PO at S$6.90 using a modified Gordon Growth dividend discount model (DDM). Our PO equates to 1.4x 2010E P/BV, wherein we have assumed a 11% sustainable ROE, 4% long-term growth rate and 9.1% cost of equity. The key risk is volatility from exposure to the emerging markets of Malaysia and Indonesia. Also, OCBC has greater mass market consumer exposure compared with its Singapore peers for which it may suffer comparatively higher credit losses during economic downturns.
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