OCBC - GEH 2Q11 results in line (DBSVickers)

BUY S$10.01 STI : 3,177.09

Price Target : 12-month S$ 12.10

• GEH’s 2Q11 earnings was dragged by lower nonpar fund life assurance profit but is within expectations when imputed in our OCBC forecasts.

• OCBC’s 2Q11 results to be released tomorrow.

• OCBC is a Buy with S$12.10 TP

2Q11 GEH net profit dragged by lower non-par fund life assurance profit. Great Eastern Holdings’ (GEH) 2Q11 net profit stood at S$118m (-26% q-o-q, +58% y-o-y). Weaker q-o-q earnings were attributed to lower non-par fund profits. This was expected due to relative movements of lower long-term bond yields coupled with a larger decline in long-term swap rates, narrowing the spread between the long-term swap rates to SGS yields. Fees and other income improved q-o-q from its asset management business, Lion Global Investors. Expenses were however higher from increased headcount and staff costs for expansion purposes. Compared to a year ago, earnings were 58% higher as performance in 2Q10 was dented by debt concerns in Europe. Imputing GEH’s 2Q11 net profit in our OCBC estimates, numbers were largely in line.

OCBC’s 2Q11 results to be released tomorrow (4 Aug, am). We estimate OCBC’s 2Q11 net profit at S$601m (-4% q-o-q, +19% y-o-y) driven by net interest income. While we expect loan growth to be fairly robust for OCBC, we believe NIM would be stable. Wealth management via Bank of Singapore (BoS) is scaling up, providing support for overall non-interest income. Overall trading income is expected to be volatile. We had highlighted that GEH’s contribution would be lower in 2Q11 (reasons mentioned above). Operating costs would likely inch up in 2Q11 on higher headcount and salary revisions. Meanwhile, provisions are expected to remain benign. Similar to its peers, additional provisions would largely relate to general provisions rather than specific. We expect NPL ratios to remain stable given that it is already at an all time low at 0.9%. OCBC guided Basel III core equity Tier-1 CAR at 10.8%, comfortably above the new MAS requirement of 9% (including the conservation buffer). We expect OCBC to declare an interim DPS of at least 15 Scts.

OCBC remains our preferred pick for Singapore banks. We still prefer OCBC (Buy, TP S$12.10) to UOB (Buy, TP S$23.50) for stronger non-interest income traction. OCBC’s performance has lagged its peers YTD.