(BUY, S$9.43, TP S$10.60)
Flat 2Q11 earnings expected. We are forecasting OCBC 2Q11 net profit of S$607m, a 3% QoQ decline. Excluding gains from divestment of non-core assets, core 1Q11 net profit would have been S$596m – suggesting a 2% sequential rise in core earnings. Whilst wealth management income could grow more robustly, net interest income is seen to be unexciting. We maintain our BUY recommendation on OCBC on the back of its growth potential in wealth management. We also see little impact from Bank Indonesia’s imminent move to cap foreign ownership of Indonesia local banks. Our target price of S$10.60 is pegged to 1.7x FY11 book.
Net interest income seen to be flat sequentially. 1Q11 NIM of 1.90% was 6 bps narrower QoQ due to changes in loan mix, refinancing of Singapore housing loans and pricing competition. We expect 2Q11 NIM to remain unchanged from 1Q11. But we believe OCBC loan could grew well in 2Q11 on the back of regional loan expansion and the strong Singapore systemic loan growth (MAS data showed May 2011 loan expanded 12.6% YTD). We are raising our OCBC FY11F loan growth to 15%, from 12% previously, to factor in the strong systemic loan growth. Correspondingly, we increased our FY11F net profit by 1% to S$2.42b.
Wealth management AUM expanding robustly. As of May 2011, Bank of Singapore expanded its earning asset base (asset under management plus loans to clients) by 13% YTD to US$36.3b, building on the 20% growth for full year 2010. In 1Q11, wealth management fees accounted for 4.4% of total OCBC income, and we see this ratio rising progressively.
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