OCBC: Most goodies priced in

Better than expected 2Q09. Net profit was S$466m (+26% q-o-q vs 1Q09 core earnings), ahead of street and our expectations due to lower provisions and higher non-interest income. Note that 2Q09 specific provisions fell 50% q-o-q. NPL ratio rose to 2.1% led by the manufacturing and general commerce segments. Loans contracted 2% q-o-q due to corporate loan repayments. The provisions set aside for Great Eastern¨s redemption of its GLC products would have offset the one-off item OCBC booked in 1Q09. Our FY09F net profit of S$1.4bn reflects core earnings. Interim 14.0 cents DPS was within expectation (scrip dividends is an option).

Tweaked assumptions. We raised our NIM assumptions by 4bps for FY09F and 5-7bps for FY10-11F, to reflect normalized SIBOR rates by end 2010. We lowered loan growth to 3% for FY09F (from 6%), but left FY10-11F loan growth at 6%. We also lowered our provision estimates by 3-10% for FY09-11F, leading to provision charge-off rates of 47-55bps for the same period. All in, earnings are revised by 4-23% for FY09-11F. We also revised our estimated book value to reflect the adjustments made to its AFS portfolio.

Goodies priced in. We believe the good news for 2009 has been priced in and to some extent 2010, too. We are downgrading OCBC to Hold, despite raising target price to S$8.00 after incorporating our revised earnings and book value. Our target price, based on the Gordon Growth Model, implies 1.6x FY10F P/BV (mid-cycle valuation).

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