Buoyant non-interest income (NII) (+22% q-q) was underpinned by a 25% q-q recovery in fee income (primarily capital market-related) and a doubling in life assurance profit, driven by valuation gains on 87%-owned life insurer GE’s non-par funds. Credit costs sharply undershot, at 76bps on an annualised basis (FY09F: 100bps) and with the bulk being for non-loan assets; gross NPL ratio inched higher (+30bps to 2.1%; mostly from manufacturing and transport in Singapore), while loan loss cover slipped below 100%, to 97%.
Apart from better-than-expected earnings momentum, OCBC should see a pick-up in book value from a S$640mn mark-tomarket gain on AFS securities – this equates to S$0.20/share and could expand over 3Q09F should equity and debt prices continue to rally. With insurance demand likely to gain traction over 2H09, and management indicating the inflow of new NPLs has slowed from 1Q09, our fee and credit cost assumptions are under review.
Our existing Gordon Growth-based price target (methodology unchanged, assuming 11% sustainable ROE, 9.5% cost of capital and 5% longterm growth) is S$8.10, implying 1.6x FY10F adjusted book value (1.4x stated book) and 12.5x FY10F earnings. Worsening credit conditions and another knock-on drop in property prices and demand would be a key earnings risk, given some 50% of the loan book consists of exposures to mortgages and building & construction loans. While we are relatively comfortable with the Singapore loan book (59% of total book) given the relative strength of domestic corporates and the broad lack of leverage in the system, the Malaysian book (19% of total) looks more vulnerable and could surprise negatively if execution of the sizeable fiscal stimulus measures aimed at cushioning the economy from the downturn is poor, or if commodity prices collapse.
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