Net interest income grew 3.9% to S$908 mil (+3.9%yoy, -4.3%qoq, 1Q09: S$949 mil) over the year as funding costs fell faster than asset yields. Net interest margin was higher at 2.35% as compared to 2.23% last year.
Non-interest income was unchanged at S$551mil as profit from other operating income, i.e. change in fair value of financial instruments, compensated for the lower fee and commission income.
Operating expenses were capped at S$520mil (+0.4 yoy, +5.9% qoq) as lower staff costs offset higher revenue related expenses. Cost to income ratio declined to 35.7%. Total impairment charges rose 158% over the year to S$465mil as collective impairment of S$321mil was set aside for loans, investments and foreclosed assets. Individual impairments more than doubled to S$151mil as Singapore impairments shot up to S$88mil as compared to a write-back of S$9mil last year.
Loans expansion slowed as gross loans expanded 0.1% in 2Q09 to S$100.3bil (+0.1% yoy, -1.7% qoq), driven by housing loans (+10.1% yoy) and professionals and private individual loans (+8.7%). However, the growth from these industries was negated by loans contraction in financial institutions, manufacturing and general commerce industries. Asset quality deteriorates as the Group recorded higher NPL of S$2.48bil and higher NPL ratio of 2.4% as compared to the 1.5% last year. Total cumulative allowances amounted to 100.0% of NPLs as compared to 128% last year.
Total CAR ratio increased to 17.5% with Tier 1 also higher at 12.6% from the issuance of Class E preference shares, higher retained earnings and lower riskweighted assets. The Bank also declared an interim dividend of 20 cents per share.
Macro economy improves The Ministry of Trade and Industry expects the Singapore’s GDP to contract by 4.0% to 6.0% in 2009, up from the previous estimate of –6.0% to –9.0%. This was largely due to an upward revision of the output estimate in 1Q09. Unemployment rate was also capped at 3.3% in June 2009 as Government introduced many initiatives for the employers to keep and retrain the workers. The two integrated resorts that are slated to open in 2010 will also provide employment opportunities and keep unemployment rate in check. With the property market heating up again and YTD consumer loans in Singapore growing at 3.81%, we are also revising our Singapore system loans growth in 2009 from –4% to 1%.
Recommendation As the economy improves in this Island state, we are lowering the market risk premium in our valuation to 6% from 6.5% we used during the financial crisis. Accordingly we adjust our target price to $17.00, peg to 1.61x FY09 NAV. However, this matrix valuation is a discount to the 5-year average P/B valuation of 1.64x NAV. Maintain HOLD rating.
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