OCBC’s 3Q11 profit disappoints at S$513m

Earnings below expectations due to contraction in non-interest income. OCBC recorded 3Q11 net profit of S$513m, down 11% QoQ. This is slightly below consensus expectations of S$543m. Net interest income expanded 6% QoQ, driven by a sharp 6.8% sequential loan book growth, but partly offset by NIM contracting 2 bps QoQ.

Non-interest income contracted 26% sequentially, due to and (1) other income recording a S$9m loss versus 2Q11’s S$86m gain; and (2) a 28% sequential decline in profit from life assurance. We are maintaining our NEUTRAL recommendation given the expectations of rising provisions going forward. We will review our earnings forecast and target price and issue a more detailed report later.

Mild sequential NIM narrowing. NIM contracted 2 bps QoQ to 1.85%. OCBC(M)’s NIM of 2.27% was also 2 bps narrower sequentially, but OCBC NISP managed to widen its 3Q11 NIM by 13 bps QoQ to 4.81%. The NIM squeeze was much more severe on a YoY basis, with a 13 bps reduction, and this can be attributed to the persistently low interest rate environment, strong growth in lower-yielding trade-link loans, and price competition, particularly for housing loans.

Greater China loans the star performer. Loans expanded 6.8% QoQ. The strongest growth segment was general commerce, which recorded a 11.9% sequential increase, and now accounts for 15% loan share. By geography, the greatest increase came from Greater China, which saw a sequential 17.6% surge, and now accounts for 13% loan share. Singapore loans grew a more subdued 4% QoQ.

Net trading loss was incurred. The weakness in non-interest income is mainly attributed to the loss from “other income”, and this is the consequence of a S$68m loss on net trading income, which compares unfavourably with 2Q11’s S$41m gain.

Tier 1 CAR dropped 1 ppt sequentially. OCBC’s Tier 1 CAR of 14.4% was 1 ppt below Jun 11’s 15.4%. but remains way above regulatory requirement of 6%. The CAR reduction is primarily due to a 5.8% sequential increase in risk weighted assets to S$122b.