OCBC Bank    Last:16.23    +0.07

OCBC

 

Oversea-Chinese Banking Corp ? Lion Capital Management Ltd, partly owned by OCBC, will manage $500m of collateralised debt obligations backed by corporate bonds held by Standard Chartered, according to Fitch Ratings. The issuer will be One George CDO Pte, Fitch said in a statement. Corporate bonds rated investment grade make up 87% of the portfolio, with the rest rated below investment grade, Fitch said. The CDOs will mature in 2017, the rating company said.

 

Announcement Title *

OCBC BANK INTENDS TO ISSUE LOWER TIER 2 NOTES

Description

Move will Further Augment Capital Base OCBC Bank announced today that it intends to issue Lower Tier 2 subordinated notes ("Notes") to further enhance the efficiency of its capital structure. The intended issue will form part of OCBC Bank's capital management plan, to be executed in a measured pace over time, to re-balance its capital mix by adding more Tier 2 capital. While the Group's total capital adequacy ratio of 12.8% as at 30 September 2007 is well above the MAS minimum requirement of 10%, it is weighted towards a relatively high Tier 1 ratio of 11.9%. As the Bank's previous Tier 2 capital issue of S$3.8 billion in 2001 is subject to 20% annual amortisation from 2006, OCBC Bank plans to replenish its Tiwer 2 capital over time. The proposed Notes are expected to have a 10-year maturity with a call option five years from the issue date at the option of the Bank, and coupon step-up after the fifth year. It is intended that the Notes will bear interest, from the issue date up to the step-up-date, at a fixed rate equal to the aggregate of the five year SGD Swap Offer Rate and the initial credit spread, and thereafter at a floating rate equal to the aggregate of the three-month SGD Swap Offer Rate and the initial credit spread plus 1% per annum. Issued by OVERSEAS-CHINESE BANKING CORPORATION LIMITED 16 November 2007 This announcement is not for distribution, directly or indirectly, in or into the United States, Japan or Canada, or to any US or Canadian person. This announcement does not constitute or form a part of any offer or solicitation to purchase or subscribe for Notes in the United States. The Notes have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold within the United States or to, for the account or benefit of, US persons except pursuant to the registration requirements of the Securities Act.

 

Singapore's OCBC to improve capital structure



SINGAPORE, Nov 16 (Reuters) - Oversea-Chinese Banking Corp , the smallest of Singapore's three listed banks, said on Friday it planned to issue lower tier 2 subordinated notes to improve the efficiency of its capital structure.

OCBC said in a statement that its total capital adequacy ratio of 12.8 percent is well above the central bank's minimum requirement of 10 percent but was weighted towards a relatively high tier 1 ratio of 11.9 percent.

It said the proposed notes would have a 10-year maturity with a call option five years from the issue date at the option of the bank, and coupon step-up after the fifth year.

 

What a day? STI close 3.04% down at half day closing... Unbelievable. I bet it will be a bad week ahead.

 

FSM - Growing Profits In The Local Banks

Some of the world's major banks have been delivering a slew of bad news recently. One after another, many of them have announced losses from their positions in investments exposed to the US sub-prime mortgages. Home-loan defaults in the US have caused a plunge in the mortgage-backed and related bonds, costing the world's largest financial institutions more than US$30 billion in writedowns and bad debts. Table 1 shows a list of charges which some of the major banks have declared for the third quarter of this year. Currently, lingering concerns about how the US finance sector would perform in the months to come, still plague the markets.

Table 1: List of Charges (Writedowns + Provisions) Incurred By The Major Banks

Source: Fundsupermart.com compilations

Provisions For Losses

Many investors would have read in the papers that the major banks have already made provisions for their potential losses related to the sub-prime. A provision for losses is usually made when the timing and amount of the losses are uncertain. For instance, when banks extend loans to the borrowers, experience would usually give them a clue that some of these may eventually become bad debts. The largest uncertainty would be to identify which of these would go bad, when will they go bad, and how much would they be able to recover from the borrower? To assume a prudent stance, so as not to run into the risks of overstating profit, banks would usually provide for these losses ? setting aside a small percentage of the total sum of these loans, and charging them against their profits. In such an exercise, and during this period of heightened volatility in the credit markets, some banks might have made larger sums of provisions than necessary. When the CDOs they hold mature and the number of defaults turns out to be less than estimated, some of these banks may then realize they have over-provided for their losses, and would thus write some of these provisions back into their profits.

How Did Singapore Banks Fare In 3Q2007?

All of the three local banks reported healthy increases in 3Q2007 earnings despite incurring provisions and mark-to-market losses for their investments in CDOs with exposure to the US sub-prime mortgages. DBS Bank Ltd was the first of the trio to report its 3Q2007 earnings on 26 October. Its net profit was up 17% year-on-year. UOB Ltd's 3Q2007 earnings increased 8.2%, while earnings for OCBC in the same period jumped 22%, compared to the same period a year ago. The banks' total earnings in the third quarter grew 13% from a year ago. The growth was broad-based with higher interest income and higher non-interest income, such as fees and commissions. The former was led by high loan growth and the improvement in net interest margin, while the latter was due to other businesses such as stockbroking, investment banking, loan syndication and wealth management.

DBS Bank Ltd Charged S$112 Million For Potential Sub-prime Losses

DBS Bank Ltd has exposure to S$2.36 billion of CDOs with S$275 million of the CDOs exposed to US sub-prime assets. Investors should note that not all CDOs are exposed to US sub-prime mortgage market. CDOs are backed by assets which could be corporate loans, high-grade mortgages, sub-prime mortgages, car loans, among others. While none of these has defaulted, DBS Bank Ltd has charged S$43 million to its profit and loss statement for the potential losses. Another S$27 million worth of cumulative general allowance was also reclassified as provisions for the CDOs exposed to the US sub-prime mortgages. In addition, there were mark-to-market losses of S$42 million charged to its net trading income related to the CDOs held by Red Orchid Secured Assets (ROSA).

UOB Ltd Charged S$66 Million For Potential Sub-prime Losses

The group's total CDO investments of S$388 million are low, compared to DBS Bank Ltd's. Similar to DBS, none of the CDOs held by UOB Ltd as investments has defaulted. UOB has made an additional S$20 million worth of provision for their potential losses and there were also mark-to-market losses of S$46 million. Amongst the three local banks, UOB has the least exposure to the CDOs.


OCBC Charged S$221 Million For Potential Sub-prime Losses

OCBC's total CDO exposure amounted to S$641 million, with S$270 million exposed to the US sub-prime mortgages. There were no reported defaults as of 30 September. OCBC's provisions for potential losses due to their sub-prime exposure in their CDOs holdings were more aggressive than the other two banks, setting aside S$221 million. This was an 82% loss of value for their CDOs exposed to the US sub-prime mortgages.

As explained previously, when the investments are held to maturity with zero or less-than-estimated defaults, some of these provisions for losses could be recovered.

Less Woes For The Local Banks

Investors are concerned that the third-quarter writedowns from the major banks may not be the last of what they might hear. UBS, for instance, have warned of additional potential writedowns, and Citigroup has disclosed on 4 November that their exposure to US sub-prime mortgages as of 30 September was at US$55 billion ? a figure much higher than its previous assessment of US$13 billion. There may be additional US$11 billion worth of writedowns resulting from their sub-prime mortgage losses, on top of a US$6.5 billion writedown in the last quarter.

Our local banks' exposure to the sub-prime mortgages, as a percentage to their total assets, is low. Also, the Tier-One capital ratio for the local banks ranges from 9.2% to 11.9% ? much better than most of the US banks. Tier-One capital is capital that is available to absorb losses without being obliged to cease trading. As such, a high Tier-One capital ratio is important to various stakeholders such as the investors, depositors, among others, as it gives them greater confidence in the banks' ability to stay solvent. An example of Tier-One capital is the ordinary share capital of the bank.

Table 2. Tier-One Capital Ratios of Various Banks

Source: Fundsupermart.com compilations
 

Conclusion

Our local banks remain well-capitalized despite their recent provisions for the potential losses in their CDO investments exposed to the US sub-prime mortgages. With corporate loans and housing loans picking up, their bread-and-butter business of interest income should bring in another good year of positive earnings growth. As such, we remain optimistic about the Singapore equity market.

 

Asian bank exposure to global credit crisis



SINGAPORE, Nov 9 (Reuters) - Exposure to structured credit and subprime mortgages have hurt the financial sector in Asia as well as triggering losses for banks in the United States and Europe since defaults began to rise on riskier U.S. home loans.

Standard & Poor's Ratings Services said on Nov 8 that global investment banks face the toughest market conditions since at least 1998 due to losses tied to subprime mortgage debt and related securities.

Most analysts are not sure if more losses are to come, but believe the overall exposure of Asian banks is a very small percentage of their overall capital.

(Click on [ID:nL022636609] for a roundup of top Reuters stories on the credit squeeze and global markets) Below is a list of Asian banks that have booked losses on their subprime and CDO (collateralised debt obligations) holdings: JAPAN Mitsubishi UFJ Financial Group Inc <8306.T> - Japan's largest bank said last month losses on subprime investments would cost it about 5 billion yen ($44.4 million) in operating profit for the six months to Sept. 30.

MUFG also said it would write down the value of subprime-related investments by about 20 billion yen as of the end of September.

The bank said its total investment in subprime-related products was about 260 billion yen, representing less than 1 percent of its 43 trillion yen in securities investments.

Mizuho Financial Group Inc <8411.T> - Japan's second-largest lender said this summer its core banking units had sold off almost all of its investments related to the subprime market.

Its unlisted brokerage arm, Mizuho Securities, posted a first half loss of 32.5 billion yen after it was forced to writed down the value of debt products held by an overseas affiliate.

Sumitomo Mitsui Financial Group Inc <8316.T> - Japan's No.3 bank said it had about 95 billion yen in subprime-related investments at end September. That represents about 0.1 percent of its total investments and loans, it said.

Nomura Holdings Inc <8604.T> - Japan's largest brokerage last month posted its first quarterly net loss in 4-½ years due to losses on mortgage-backed securities (MBS), booking a group net loss of 10.5 billion yen in July-September.

The brokerage has been cutting its mortgage portfolio and said in October it had been able to shrink its residential mortgage-backed securities (RMBS) exposure to 14 billion yen from 266 billion yen as of the end of June.

CHINA Bank of China <3988.HK> <601988.SS> - The country's flagship foreign exchange lender booked $643 million in provisions and reserves to account for its exposure to U.S. subprime MBS in the third quarter, the largest exposure revealed by Chinese banks.

The carrying value of Bank of China's investment in subprime asset-backed securities (ABS) and subprime collateralised debut obligations (CDO) totalled $7.9 billion as the end of September, or about 3.05 percent of total investment securities.

Industrial and Commercial Bank of China Ltd <1398.HK> <601398.SS> - The world's largest bank by market capitalisation said the fair value of its U.S. subprime MBS was 1.62 billion yuan lower than their amortised cost at end September, of which 429 million yuan was charged as an impairment provision.

ICBC said the face value of its U.S. subprime MBS was US$1.23 billion.

China Construction Bank <0939.HK> <601939.SS> - The bank, 8.5 percent owned by Bank of America , booked 336 million yuan in allowance for impairment losses on U.S. subprime MBS by the end of September.

SINGAPORE DBS Group - Southeast Asia's biggest bank in terms of assets had the biggest exposure to CDOs among Singapore's banks, totalling S$2.36 billion.

DBS said none of the CDOs it holds have defaulted, but it set aside S$70 million for its exposure to U.S. subprime mortgage debt, and marked down S$42 million against its exposure to an investment vehicle that invests in risky debt derivatives.

A bank spokeswoman said it may make further charges or write-backs depending on market conditions.

United Overseas Bank - Total CDO investments of Singapore's second-biggest bank in terms of assets remain at S$388 million, of which S$90 million are in ABS CDOs. The remaining S$298 million are in corporate CDOs, of which S$101 million are due to mature by March 2008.

In the third quarter another provision of S$20 million was made, bringing the total provisions to S$55 million. It also took a S$46 million provision to reserves for mark-to-market losses.

None of UOB's S$388 million CDOs held as investment is in default, the bank said.

Oversea-Chinese Banking Corp - Singapore's third biggest bank took the biggest hit on its portfolio of credit derivatives including U.S. subprime mortgages. The bank wrote down S$221 million ($152.4 million) of the S$641 million worth of CDOs it holds.

Its provisioning rate for asset-backed CDOs alone was 81.5 percent. There was an additional S$3 million of writedowns on corporate CDOs, it said.

SOUTH KOREA Woori Bank - The unit of third-ranked Woori Financial Group <053000.KS> had $333 million of exposure. Woori Financial Group had written off $159 million in the third quarter. No other Korean banks said they have written down or have taken charges on their supbrime exposure.

Shinhan Bank - The unit of South Korea's second-largest financial services firm Shinhan Financial Group <055550.KS> has about $5.3 million of subprime exposure, while Korea Exchange Bank has $3.7 million.

Other major banks -- top lender Kookmin Bank <060000.KS> and Hana Financial Group's <086790.KS> Hana Bank -- said they had no exposure.

Nonghyup, a specialist lender set up to lend mainly to farmers, declined to comment if it had exposure to the U.S.

 

Whatever good news OCBC has, the price will not move upwards. Market sentiment is pretty low and I feel so lost. Unable to decide to buy though I have catered some money aside to invest... @@ swirling eyes(blurred)

 

S'pore OCBC to own 15 pct of Vietnam VP Bank

Vietnam's VP Bank said on Wednesday it would sell an additional 5 percent stake to Singapore's Oversea-Chinese Banking Corp <OCBC.SI> for $25.5 million, bringing OCBC's total stake in VP Bank to 15 percent.

"At the proposal of OCBC, VP Bank has officially agreed to further sell shares to OCBC to raise this strategic shareholder's ownership to 15 percent from 10 percent," Chief Executive of the unlisted Vietnamese bank, Le Dac Son, said in a statement.

Son said OCBC, Singapore's third-biggest bank, would pay $25.5 million for the stake, higher than the value that the Singapore bank paid to acquire 10 percent of VP Bank last year.

In March 2006, Hanoi-based VP Bank sold 10 percent of its shares to OCBC for 250 billion dong ($15.5 million).

The deal will make OCBC the second foreign bank to hit the 15 percent ceiling for a single strategic investor's ownership of a Vietnamese bank. HSBC Holdings Plc. <HSBA.L><0005.HK> has a 15 percent of stake in Techcombank.

VP Bank, or Vietnam Bank for Private Enterprises, would now be valued at $510 million, based on the latest sale.

The transaction would be completed after VP Bank raises its registered capital by 33 percent to 2 trillion dong ($124 million) late this year, the statement said.

Vietnam caps the foreign ownership in a domestic bank at 30 percent, with a 15-percent limit for a strategic investor.

Vietnam's banking sector is forecast to post a credit growth of up to 38 percent this year, the central bank has said, above its initial target of 18 percent to 22 percent.

The Planning and Investment Ministry has forecast deposits this year would grow 31.5 percent. Vietnam has a population of 85 million people, but only 6.5 million have bank accounts as at the end of August, up from 5 million in late 2006.

 

OCBC's Malaysian arm to set up Islamic bank unit

Oversea-Chinese Banking Corp <OCBC.SI>, Singapore's third-biggest bank, said on Wednesday that its Malaysian subsidiary has received regulatory approval to set up an Islamic banking unit in the Muslim majority country. The bank said in a statement that Bank Negara Malaysia has given it "in-principle" approval, and this would allow it to conduct the full range of Shariah-compliant banking business, including Islamic hire-purchase and Shariah-compliant corporate finance activities.

HSBC Holdings <HSBA.L> also said on Wednesday it has won a licence to set up a standalone Islamic bank in Malaysia.

Malaysia accounted for 19 percent of OCBC's profit before tax in the first nine months of the current financial year.

OCBC Malaysia's income from Islamic banking rose 57 percent to 58 million ringgit ($17.42 million), while total Islamic banking deposits grew 35 percent from a year ago to 2.9 billion Malaysian ringgit as at September 30.

Islamic finance operates along guidelines set out under shariah law whereby devout Muslims will not purchase assets that pay interest or earn profits from industries related to gambling, alcohol or pork, for example.

Malaysia, home to the world's largest Islamic bond market, aims to become an international hub for Islamic finance and has been encouraging local and foreign banks to put their Islamic banking businesses under standalone subsidiaries.

 

MEMBERS? VOLUNTARY LIQUIDATION OF STRAITS LION ASSET MANAGEMENT LIMITED  

At an Extraordinary General Meeting of Straits Lion Asset Management Limited (the ?Company?), held on 1 November 2007, the shareholders of the Company passed a special resolution for the members? voluntary winding-up of the Company. The Company is 70% owned by Great Eastern Holdings Limited (?GEH?), a subsidiary of Oversea-Chinese Banking Corporation Limited (?OCBC?), and 30% owned by Orient Holdings Private Limited, a wholly-owned subsidiary of OCBC.

The Statutory Declaration of Solvency of the Company, duly executed by the Board of Directors, in compliance with the Companies Act Cap. 50, has been lodged with the Accounting and Corporate Regulatory Authority.

The voluntary liquidation of the Company is not expected to have any material impact on the net tangible assets or earnings per share of OCBC Group for the financial year ending 31 December 2007.

 

Singapore's OCBC to buy 5 pct stake in Vietnam bank



HANOI, Nov 7 (Reuters) - Vietnam's VP Bank said on Wednesday it would sell an additional 5 percent stake to Singapore's Oversea-Chinese Banking Corp for $25.5 million.

"At the proposal of OCBC, VP Bank has officially agreed to further sell shares to OCBC to raise this strategic shareholder's ownership to 15 percent from 10 percent," Chief Executive of the unlisted Vietnamese bank, Le Dac Son, said in a statement.

He said OCBC, Singapore's third-biggest bank, would pay $25.5 million for the 5 percent stake.

 

If you ever notice, whenever any of the other 2 banks is below water, OCBC will also be under water.

Its only when both banks cheong, then OCBC will move up by 5c ~ 15c.

OCBC do not seem to move trend independently, even when it published good quarterly result.

Sianz.

 

OCBC , they say, is "Solid As A Rock"

I think OCBC management did the honorable thing to write-down sharply their CDO exposure, unlike DBS and UOB. Get the surprises out of the way is better than hoping the future will eventually turn out rosy.

Shame on Sembcorp Marine management, they are doing a "Solitaire" all over again.

 

UOB KH - BUY; TP $11.40

3Q07 core net profit rose 12% yoy

OCBC reported 3Q07 net profit of S$463m, up 22% yoy. Excluding the 3Q07 tax refund of S$38m, core net profit would have risen 12% yoy to S$425m.

Robust 19% yoy increase in net interest income. This is primarily attributed to a 18.7% yoy and 3.2% qoq rise in interest-earning assets to S$108b, mainly in corporate and SME loans in Singapore and the region. Net interest margin (NIM) widened a marginal 1bp yoy to 2.07% but was 6bps narrower qoq ? the sequential contraction is due to average yields declining faster than the average cost of funds. OCBC(M) NIM was 26bps lower yoy and 9bps lower qoq at 2.41%.

Non-interest income expanded 35% yoy to S$481m, driven by a) fee and commission income surging 36% or S$56m yoy, due to (1) brokerage (+167% or S$25m); (2) wealth management (+32% or S$10m); and (3) loan-related (+43% or S$10m); and b) other income tripling (+S$77m), due to (1) foreign exchange net dealing income rising 195% or S$45m; and (2) net gains from investment securities rising 138% or S$18m. Non-interest income share of total income is now 46%, up from 3Q06?s 43%.

Flattish expense-to-income ratio. Operating expenses rose 28% yoy to S$427m, attributed mainly to staff costs rising 38% on higher bonus accruals, higher base salaries and headcount rising 16% yoy to 18,126 as at 30 Sep 07. However, the cost-to-income ratio of 40.8% is close to 3Q06?s 40.0% due to the robust expansion in operating income. An allowance of S$221m was taken for ABS CDO portfolio of S$270m, which is part of total CDO portfolio of S$641m. This allowance was partially offset by net write-backs in allowances for loans and properties, resulting in overall net allowance of S$39m.

Gross loans expanded 14.5% yoy or 4.1% qoq. The S$2.7b qoq increase in gross loans can be primarily attributed to a) manufacturing (+S$0.6b or 10.3% qoq); b) building and construction segment (+S$0.7b or 5.8% qoq); and c) housing loans (+S$0.5b or 3.0% qoq), driven by Singapore private housing loan.

Asset quality remains strong. NPLs of S$1.48b was 8% lower qoq. Correspondingly, the NPL ratio of 2.1% is also lower than Jun 07?s 2.4%.

We raised our FY07F net profit by 2% to S$2,095m to take into account the 3Q07 tax refund. Our FY08F net profit yoy decline is due to 1H07 one-time gains of S$152m, and robust investment gains in 1Q07, which we assume will not repeat in 2008.

Maintain BUY. Our OCBC target price of S$11.40 is pegged to 2.4x multiple over 2008 RNTA of S$4.73 (excluding revaluation surpluses from Great Eastern Holdings), which is not excessive as OCBC traded at

 

DBS Vickers - Banking Sector

3Q07 results: Strong y-o-y from income growth; trading and provisions weaken q-o-q

UOB came in below expectations for 3Q07 but cumulative 9-months numbers were in line with our FY07 estimates. 1H07 numbers were strong aiding the shortfall to our estimates for 3Q07. We expect 4Q07 NIM to pick up and loan growth to continue soaring. Maintain Buy and S$27.50 target price based on the Gordon Growth Model.

OCBC 3Q07 results were in line with expectations despite S$221m set aside for its ABS CDO investments of S$270m. We expect overall revenue to remain strong coupled with accelerating loan growth going forward. Maintain Buy and S$10.40 target price based on the Gordon Growth Model.

Maintain Overweight. We believe Singapore banks would not disappoint in the 4Q07 and the corresponding FY07 results given that loan growth is strong and fee income remains robust. The recent release of Singapore banking statistics indicating loan growth of 12.8% y-o-y provides a positive signal.

 

DBS Vickers - Most conservative treatment on CDO provisions made Buy S$8.90 Price Target : 12-month S$ 10.40

Story: OCBCs 3Q07 results were within expectations. OCBC made allowances of S$221m for its ABS CDO investments out of a total of S$270m ABS CDO investments. This marked an 82% provision made on its ABS CDO portfolio, which appears to be the most conservative compared to its peers.

Point: We note that topline growth remained strong with income expansion across the board. Earnings were mitigated by higher provisions related to ABS CDO investments.

Relevance: Maintain Buy with target price unchanged at S$10.40 based on the Gordon Growth Model. Although OCBCs share price has outperformed its peers, we believe there are still value propositions.

 

CITI - Buy: 3Q07 CEO Briefing Highlights

Buy/Low Risk 1L

Price (06 Nov 07) S$8.90

Target price S$9.75

Expected share price return 9.5%

Expected dividend yield 3.1%

Expected total return 12.7%

Market Cap S$27,826M

US$19,184M

 Maintain forecasts, target S$9.75?OCBC produced a creditable 3Q result in tough market conditions including a proactive, conservative provision of 82% of its sub-prime related CDO exposures. Mortgage growth of +3%qoq is expected to gather pace with new 3Q mortgage sales up 50%. OCBC is a beneficiary if Singapore short term rates remain low or fall further.

 Conservative on CDOs?In providing S$221m (82%) of its S$270m sub-prime CDOs, OCBC has "prepared for the worst". It abandoned third party prices in favour of a valuation model using US data. No CDOs have defaulted, but 3 CDOs worth US$25m have had ratings downgrades and 2 (US$22m) placed on negative watch. A S$3m charge was taken on its S$372m corporate CDOs.

 Mortgages gather pace?Post several quarters of no growth, mortgages rose 3% qoq, reflecting a return to competing in the private housing market given more reasonable pricing. Mgmt noted that 3Q mortgage sales rose 50% qoq, and viewed that mortgage demand remained strong, with past launches nearing completion, and no more deferred payment schemes. En bloc sales and the integrated resorts should also drive construction lending.

 Beneficiary of low interest rates?Higher dependence on fixed deposits means OCBC may benefit if short term interest rates remain low. Mgmt did not expect mortgage pricing to be undercut given strong demand, and global banks could be less competitive in bidding for project loans given their present constraints.

 

Phillip Securities - BUY; TP $10.90

Core net earnings increased to S$425m (+12.1% yoy, -18.0% qoq, 2Q07: S$518m), attributed to higher net interest income (S$565m, +19.5% yoy, +1.3% qoq) and non-interest income (S$481m, +34.7% yoy, -2.4% qoq). Net interest margins slipped 6bps to 2.07% due to lower yields on loans and inter-bank placements but spread between customer loans and deposits remains high at 2.95%.

Gross loans expanded to S$68.0b (+14.5%yoy, +4.1%qoq), driven by higher building and construction loans (S$11.9b, +33.6%yoy, +5.8%qoq) and housing loans (S$18.6b, +2.7%yoy, +3.0%qoq). Cost to income was higher at 40.8% due to higher staff costs (+38.0%yoy, +6.9% qoq) and other operating expenses (+28.3%yoy, + 2.6% qoq).

The bank made an astonishing S$221m allowance for its S$270m ABS CDOs using third party valuation model, but was offset by a S$82m write back in allowances for loans and S$101m for properties and other assets.

NPLs fell 8% to S$1.48b while the NPL ratio improved to 2.1% from 2.4% last quarter. Total cumulative allowances amounted to 107.2% of NPLs as compared to 104.0% last quarter. CAR ratio dipped to 12.8% (3Q06: 15.8%, 2Q07: 14.6%) with Tier 1 declining to 11.9% (3Q06: 12.9%, 1Q07: 12.5%) as the amount of risk weighted assets increased.

ROE slipped to 11.5% (3Q06: 12.3%, 2Q07: 15.4%) while ROA decreased to 1.33% (3Q06: 1.43%, 2Q07: 1.71%) as equity was boosted from MTM gain of S$1.02b due to Bank of Ningbo?s increased market valuation. Diluted EPS decreased to S$0.53 (3Q06: S$0.47, 2Q07: S$0.65) while net book value increased to S$4.72 (3Q06: S$3.90, 2Q07: S$4.39) over the year.

We believe OCBC has taken a kitchen sink approach in providing allowance for 82% of the ABS CDOs and thus we should not expect any more allowance in the coming quarters. Taking the CDOs issue aside, growth in core earnings remains commendable. Therefore, we maintain OCBC?s target price to S$10.90, 2 x FY08 NAV based on our Gordon growth model. Maintain BUY.

 

OCBC Bank's third-quarter net profit rose 22 per cent to $463 million from a year ago, despite taking a $221 million writedown in debt securities linked to US subprime mortgages. Compared with the second quarter, net profit for the three months ended Sept 30 fell 13 per cent, mainly due to the hefty charge made against its portfolio of ABS CDOs, or collateralised debt obligations (CDOs) comprising pools of asset-backed securities (ABS). The value of the portfolio was slashed by 82 per cent from $270 million to just $48 million, after the bank said it decided to use a third-party valuation model to value them instead of relying on quotes in a market that had become 'illiquid and inactive'. Chief executive David Conner told reporters that with the large writedown, the bank had 'prepared for the worst and there logically is not going to be any future earnings impact from this portfolio'. The charge was partly offset by some $183 million worth of net writebacks in past allowances for loans and properties, resulting in an overall net allowance of $39 million for the quarter. A tax refund of $38 million received in the third quarter also helped cushion the blow to the bank's bottomline.

 

KIM ENG - Staying Firm; TP $9.95

♦ Core earnings in line with market expectations
OCBC recorded 3Q07 core earnings of S$425m, within bloomberg consensus of S$430m but 5% shy of our estimates. Key variances from our forecast came from higher provisioning and operating cost. Core earnings rose 12% Y/Y growth on continual strength in lending and fee-based income. Overseas pretax earnings excluding CDO allowances (S$117m) charged to Malaysia rose 17% Y/Y but fell 8%Q/Q. Expense ratio rose due to higher headcounts and promotion expenses.

♦ Net interest income (NII) catching up; fee income continues to fly
NII was led by loans growth (+14.5% Y/Y) from SME and corporate loans. On sector basis, loans growth from manufacturing, building & construction and transport were up more than 30% Y/Y and sustained strong momentum sequentially. Housing loans accelerate, up 5% Q/Q. NIM was up 1bps from a year ago to 2.07% but fell 6 bps sequentially due to lower NIM from MY and lagging loan repricing in Singapore. Fee-based income rose 36% Y/Y but slide 3% from 2Q07 with strong contributions from stock-broking, wealth management and loan-related income. Trading income held firm as higher forex income offset lower dealing income from securities and derivatives.

♦ No sweat on CDOs
An allowance of S$221m was taken in 3Q07 for the bank?s ABS CDO portfolio (82% of total ABS CDOs of S$270m) base on third party valuation model. This allowance was partially offset by net write-backs in allowances for loans and properties totaling S$183m. The management took a very prudent approach towards the ABS CDOs which showed signs of weakness.

♦ Cultivating sustainable growth
Efforts to lower cost of funding, strong mortgage pipeline and strengthening overseas franchises point to sustainable growth. Its 72.4% stake in Bank NISP has been making good progress and is expanding rapidly at 40-50 branches per year. Concurrently in China, the group was granted approval on local incorporation and the group aims to open at least 2 branches a year within first tier cities. Besides, the group?s 10% stake in Bank of Ningbo, will not only facilitate its expansion in China but had also capped unrealised gains of close to S$1bn following its listing on Shenzhen bourse.

♦ Good value, Maintain Hold
We have kept our FY07 earnings estimates intact. OCBC currently trades at 1.68x FY08 PBV. Despite trading at a premium to its peers, forward growth maybe constrained by potentially lower loan recoveries and higher operating expenses. Our target price is raised to S$9.95 (1.95x FY08 core PBV) as we factored in write-offs on its ABS CDOs instead of the total CDO portfolio. Maintain Hold.