Excerpts from reports by 9 foreign houses on OCBC after its Q2 results:
Photo by Sim Kih
#1 JP Morgan: We stay Neutral on OCBC, even though we raise our 2009-11 earnings estimates by 16%-21% and, consequently, our Dec-09 Price Target to S$8.50 (two-stage Dividend Discount Model) from S$6.50. Higher non-interest income was the key driver for the earnings revision.
We expect non-par funds (at Great Eeastern Holdings) and market related fee income to benefit the bank. We still prefer DBS in the sector. Key risks to our view: better-than-expected margins and loan growth. Price Target: S$8.50. Previous: S$6.50
#2 Credit Suisse (rating – neutral): OCBC’S 1.6x P/B 2009E and 17.4x P/E 2010E correspond to arange of 10.5-11.0% ROEs, which is what we are forecasting for 2011E and using for our new target price of S$8.0 (from S$6.5), hence the upside is relatively limited, in our view. OCBC has doubled from the March lows but has underperformed peers.
#3 Deutsche Bank (target price: $8.10): With 2Q09 results consistent with expectations our estimates are unchanged. However, we note some favourable trends in the period, particularly in relation toloan losses, and should these continue we believe there is potential upside to consensus forecasts. But with the stock trading broadly in line with our valuation we maintain our Hold rating and see better value elsewhere in the Singapore bank sector with DBS (Buy; SGD13.88) still our top pick.
#4 Macquarie Research: We raised our FY09 and FY10 net profits by 28% and 32%, respectively,largely on higher non-interest income assumptions. Our new target price is S$7.97, up from the previous S$6.76. The group is trading at its historical mean in terms of P/BV although it remains in line with the sector.
However, the weak underlying trends in its results, together with the uncertain economic recovery ahead suggest we should remain Neutral on the group at this time. Moreover, we anticipate higher NPLs arising from the lagged effect of the downturn to remain a feature.
#5 Morgan Stanley (price target: $7.00): The first decade of this century is shaping up to be a “lost one” for Singaporean banks. They exited the 97/98 Asian Crisis in relatively good shape but have since failed to leverage that position by increasing their presence meaningfully in the higherreturn, higher growth markets (for example, Indonesia).
With a normalized RoE assessed at 10% (refer 21 July 2009 – “Dissecting Regional Returns”), OCBC is our least preferred bank exposure in Singapore. Moreover, the cloud of lending into a Singapore property bubble continues to hang over the stock. On our FY09e estimates, OCBC is trading on 13.4x EPS and 1.6x book, which is fair value at best, if the recovery is V-shaped,and expensive if the recovery is shallow and troubled …which is our macro team’s base case.
#6 Nomura: Our existing Gordon Growth-based price target (methodology unchanged, assuming 11% sustainable ROE, 9.5% cost of capital and 5% long-term growth) is S$8.10, implying 1.6x FY10F adjusted book value (1.4x stated book) and 12.5x FY10F earnings. Worsening credit conditions and another knock-on drop in property prices and demand would be a key earnings risk, given some 50% of the loan book consists of exposures to mortgages and building & construction loans.
While we are relatively comfortable with the Singapore loan book (59% of total book) given the relative strength of domestic corporates and the broad lack of leverage in the system, the Malaysian book (19% of total) looks more vulnerable and could surprise negatively if execution of the sizeable fiscal stimulus measures aimed at cushioning the economy from the downturn is poor, or if commodity prices collapse.
#7 UBS Investment Research: While the result beat expectations, we expect Q3 earnings to be muted because of one-off compensation to its insurance customers for the purchase of investment linked products that had CDOs. The one-off cost to OCBC is about S$218m, 14% of our full-year estimate. We plan to revisit our estimates once all the Singaporean banks report their results. We derive our price target of S$8 by using the Gordon growth model; our main assumptions are ROE of 11.3%, COE of 7.6%, and terminal growth of 3%.
#8 Merrill Lynch (price objective: $9.50): The message from OCBC’s briefing was clear: The credit growth outlook remains anemic while NIMs are likely to remain under pressure as long as interest rates remain subdued. On a brighter note, mgt certainly seems more upbeat on assetquality and provisions compared to previous quarters. Maintain Buy.
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