Will OCBC’s increased US$ trade finance loans continue?

CIMB expects a loan growth of 6% qoq despite high US$ LDR and a general scarcity of dollar deposits in the system.

According to CIMB, OCBC is due to announce 4Q11 results on 20 Feb and they expect a net profit of S$582m (+13% qoq), in line with consensus’s S$582m.

Here’s more from CIMB:

We expect PPOP (+14%qoq) to be up, largely due to an easy comparison with a weak 3Q11. The last quarter was weighed down by trading losses and non-par fund losses at Great Eastern, so some reversion might come on. We do not expect trading losses to recur, though a strong rebound in treasury revenue is unlikely either, especially in a seasonally weak and quiet quarter.

OCBC’s wealth-management outfit, Bank of Singapore, should report very strong AUM growth but we doubt this will translate to a like-for-like improvement in wealth-management-related income. Our ground checks with Singapore private bankers suggest that although 2011 AUM growth could be in the range of +30% yoy, profitability was probably flat.

On the lending side, OCBC had been newly aggressive in the domestic market, judging by a comparison of mortgage rates. Such aggression should not be at the expense of margins though, since mortgage rates for the three banks had been raised in 4Q11 (est. +20bp).

Corporate spreads are also going up but SME lending spreads are still competitive. OCBC increased its US$ trade finance loans rapidly in earlier quarters. Will this continue, given a high US$ LDR and a general scarcity of dollar deposits in the system? We expect loan growth of +6% qoq. Geographically, Singapore and Malaysia margins seemed to be stable but Indonesia’s margins should still be narrowing.

Overall, we expect OCBC’s margins to be flat (2Q: 1.85%) or slightly up. On the balance sheet, its AFS (available-for-sale) portfolio contracted S$228m in 3Q. With a flat Bank of Ningbo’s share price in 4Q, any recovery in marked-to-market losses would be minimal, we suspect. We expect 2H DPS to be raised slightly to S$0.16 (1H: S$0.15).

Outside of results, we believe investors will be trying to assess its new generation of managers. CEO David Conner (aged 63) recently announced his retirement. Mr Conner had headed OCBC for a decade, doing a good job. His retirement came on the heels of that of the former CFO, Soon Tit Koon (aged 60), months earlier. In private banking, there was also some re-jigging of senior-management positions recently.

Also, Chris Wei (ex-AIA executive) took over the top job at Great Eastern slightly more than a year ago. With the recent years proving to be quite a bit of a management transition, investors will be interested in any material change in strategic plans at OCBC. It would be too early to expect strategic discussions from CEO-elect Samuel Tsien, though that must be one of the heavily-anticipated developments.