OCBC’s lending grows 9% in 2Q11

2Q11 results review. Strong loan growth supported 2Q11 earnings despite lower NIM and disappointment from trading income. The lower insurance contribution was expected.

OCBC recorded 9% q-o-q and 27% y-o-y (YTD: 14%) loan growth. NIM was 3bps lower due to lower yielding trade- related loans and competition. Expenses were higher in relation to increased headcounts and staff costs for expansion purposes. Provisions were almost all related to portfolio allowances in line with the strong loan growth, while specific allowances continued to decline. NPL ratio further reduced to 0.8% with most improvements from its Malaysian portfolio. Capital ratios were strong although a tad lower q-o-q from 3% increase in risk weighted assets. Interim 15 Scts DPS was declared.

Prospects. Loan growth is expected to moderate in 2H11 with 2011 loan growth guided at 20-21%. Issues pertaining to foreign ownership in Indonesia remain vague but there is an indication that banks may be given up to 15 years to comply with the lower required shareholdings. OCBC owns 85% of OCBC NISP. Contribution from OCBC’s Indonesian operations approximately accounts for 3% of group profit.

OCBC remains in expansion mode in Malaysia with another 5 new Islamic banking branches by the year-end. Deposit taking efforts in Malaysia are likely to benefit from cross-selling into wealth management.

Our preferred pick. We think OCBC deserves to trade at a premium to its peers given its earnings trajectory to-date and its projected growth over the next 3 years. With a clearly differentiated strategy aimed at developing its non-interest income niche in insurance and wealth management/private banking, we believe its forward ROE should stack up better against its peers. OCBC remains a Buy with TP of S$12.10.