Why OCBC is the biggest loser among Singapore's top 3 banks

Credit costs were near-zero.

According to Macquarie Equities Research, in its view, OCBC’s 1Q13 financial performance was the weakest of the three Singapore banks (DBS, UOB) in that the earnings “beat” was led entirely by credit costs, which were close to zero. 

Macquarie noted that OCBC has certainly posted very solid asset quality results in recent years, but even so it’s hard to believe that specific provisioning will remain at 1bp going forward. In the meantime, pre-provisioning operating profit was weak, and we are concerned this is not yet built into in consensus expectations.

"1Q13 was an extremely solid quarter for DBS, and a good quarter for UOB. We were less impressed with OCBC’s results given the weakening pre-provisioning operating profit," said Macquarie.

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Weak pre-provisioning operating profit has been a negative barometer of underlying profitability. NIMs are under pressure and will remain so as Singapore mortgages reprice, and OCBC appears at risk of losing market share in HDB financing as DBS rolls out its competitive product.

Insurance earnings are volatile and linked to capital market returns, which is not helpful given our bearish strategy view. Moreover, the VNB trends at Great Eastern have been negative, and we are cautious on the Singapore insurance market.

Risks to a short position. We find it difficult to envision further upside for this stock other than blind liquidity inflows or, more intriguingly, asset divestment.

We believe the best thing OCBC could do to unlock shareholder value would be to sell its 87% stake in GE. Realistically, we see this as a tail risk however, as management is more likely to look to acquire rather than divest.