View: Key earnings drivers (loan growth, margins, NPLs) remain soft and the main factors behind earnings revision are lower provisions and higher trading income, both relatively inferior quality. 2Q09 performance was robust but boosted by capital markets (fee, insurance) and volatility (trading). In terms of key drivers, OCBC managed to maintain loan spreads but overall margins were down QoQ and are likely to remain at current levels. Loan book is not really growing while NPLs continue to creep up, albeit at a slower pace. Fee income and insurance should hold up in 2H09, but insurance would be hit by a S$218 mn liability in 3Q09 on early redemption of CDOrelated structures sold by insurance subsidiary to retail investors.
Catalyst: CDO-related loss in 87%-owned Great Eastern Holdings could create a drag. Other than that, we do not see any major catalyst near term, unless the economic recovery leads to strengthening of earnings drivers. An interesting angle would be whether OCBC takes this opportunity to make a general offer for the remaining 13% stake in Great Eastern Holdings.
Valuation: OCBC’S 1.6x P/B 2009E and 17.4x P/E 2010E correspond to a range of 10.5-11.0% ROEs, which is what we are forecasting for 2011E and using for our new target price of S$8.0 (from S$6.5), hence the upside is relatively limited, in our view. OCBC has doubled from the March lows but has underperformed peers.
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