OCBC - as solid as gold

Benefitting from surge in home sales. Sales of private residential properties have surged 240.7% yoy to 2,596 units in 1Q09 with buyers taking advantage of low interest rates and interest absorption scheme (IAS). Buying momentum continued unabated in 2Q09 and has reduced the risk of default by property developers. OCBC has the largest exposure to property developers with Building & Construction accounting for 20.8% of total loans in 1Q09 (DBS: 14.1%, UOB: 12.5%).

Steady contribution from life insurance business. We expect low probability of negative surprises from marked-to-market losses at Great Eastern for nonparticipating funds given improvement in sentiment in the equity market. In Singapore, domestic consumption has normalised and we expect sales of life insurance products to improve going forward. In Malaysia, Great Eastern will be able to distribute insurance products through OCBC’s branch network due to liberalisation of the financial sector.

Solid as a rock. OCBC is the most well capitalised bank in Singapore with tier-1 CAR at 15.1%. Given that the worst is likely behind us in terms of GDP contraction, OCBC could utilise surplus capital for reactivation of its share buyback programme or exercise option to redeem 5.1% non-cumulative class B preference shares of S$1b in July 2013. Management focuses primarily on organic growth and will expand regionally in Indonesia and China.

OCBC’s P/B of 1.42x is one standard deviation below its long-term average of 1.82x. BUY with target price of S$8.12 based on a P/B of 1.58x derived from the Gordon Growth Model (ROE: 11%, payout ratio: 48%, required return: 8% and constant growth: 4.5%).

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