BUY
Price S$9.88
Previous S$10.60
Target Under Review
OCBC recorded 2Q11 net profit of S$577m, up 15% YoY, QoQ and down 8% QoQ. This is close to ours and consensus expectations of S$607m and S$603m respectively. We will review our earnings forecast and recommendation after the analyst briefing later.
Continued NIM squeeze but loans expanded strongly. Net interest income rose a marginal 6% sequentially, driven by loan expansion of 9.4% QoQ. General commerce loans rose 33% QoQ and accounted for 14% loan share. Group NIM of 1.87% was 3 bps narrower QoQ, due to the persistent low interest rate environment, strong growth in well-collateralised, lower yielding loans linked to trade, and housing loan price competition. NIM was also squeezed for its regional operations, with OCBC(M)’s NIM of 2.29% down 10 bps QoQ and OCBC NISP’s down 37 bps QoQ to 4.68%.
Fees and commissions performed well. Non-interest income grew 13% YoY, and declined 11% QoQ. Fees and commissions rose 9% QoQ, driven by service charges, trade-related fees and remittances. Wealth management fees recorded a 10% QoQ decline. However, we continue to see strength in OCBC’s private banking business, with assets under management rising 12% in the first six months to US$29.6b.
Operating expenses rose 11% YoY and 6% QoQ to S$618m due to higher staff costs from headcount growth, salary increments, and sales commissions and incentive compensation linked to stronger business volumes.
Asset quality and CAR remain robust. NPL ratio improved to 0.8% from 1Q11’s 0.9%. OCBC remains well capitalised, with a Tier 1 CAR of 15.4%, and total CAR of 17%, well above regulatory minimums of 6% and 10% respectively.
OCBC declared an interim dividend of S$0.15 for 1H11, similar to the 1H10 interim dividend. This represents 43% of core net profit. The Script Dividend Scheme will be applicable to the interim dividend.
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