OCBC’s earnings to slump 6-8%, warns analyst

• Downgrade to Underperform from Neutral; target price cut to S$8.20 (1.34x P/BV), from S$10.19 (1.66x P/BV). We cut our FY11-13 earnings by 6-8% mainly from insurance and trading-related income. Our target price follows lowered ROEs down to S$8.20, now based on 1.34x CY11 P/BV (GGM, ROE 11.1%, COE 9.2%, growth 4.3%). We are wary of the new credit cycle even though OCBC managed the last one well. Its Asean credit was less affected then. Earnings risks now stem from revenue shortfalls, in our opinion. That is the basis for our earnings and rating downgrade, and could potentially trigger a de-rating.

• Smaller capital-market fees; insurance, WM contributions can slow too. OCBC’s investment-banking and stock-broking contributions are smaller than peers. Its topline volatility typically stems from insurance, which has a tendency to be hurt by lower contributions from non-par funds and poorer investment returns when markets crumble. Wealth-management fees can also slow.

• Premium valuations. OCBC’s credit risk management and more sustainable insurance business tend to put its valuations at slight premiums to the sector. A comparison of current P/BV with 2003 lows (recession scenario) and 1998/2009 lows (crisis) suggests that its downside is somewhere in-between that of DBS and UOB. Common de-rating catalysts for the sector are growing fears of a banking
contagion.