OCBC's 4QFY14 earnings disappoint at SGD791m

Higher operating expenses and credit costs cited.

Singapore's OCBC reported 4QFY14 net profit of SGD791m, 8% below Nomura's estimate and 11% below consensus.

According to a research note from Nomura, the difference between the result and its estimate was due to higher operating expenses and higher credit cost.

The credit cost contained generous portfolio allowance which we think may not repeat in the coming quarters.

While the result did not surprise on the upside, Nomura believes rising interest rates and divestment of its non-core assets, could excite the market.

Here's more from Nomura:

Oil and gas and commodities exposure is manageable: The oil and gas portfolio is less than 7% of its loans and commodities is below 5%.

Most of the exposure in the oil and gas category is to mid-stream (transport) and downstream (traders), and management believes their clients can absorb short-term stress. There is no exposure to exploration. Most of the exposure to commodities is in the form of trade finance rather than storage.

Expect deterioration in asset quality: Management believes the credit environment could become tougher in 2015 because of the fall in commodities prices and slower economic growth. They believe industries with overcapacity such as steel and shipbuilding could pose an asset quality problem.

The property portfolio is viewed as relatively safe, with no specific provisioning for it in Singapore or Hong Kong in 2014.

Loan growth to slow: The bank expects loan growth to be in high single digits in 2015. Higher interest rates: Only 50% of their variable rate loans in Singapore are linked to the SIBOR and SOR interest rate.

The remaining are mainly linked to the Prime and Board rates and these have been static in the last few years (80% of DBS SGD variable rate loan book is pegged to SIBOR/SOR interest rate).

They estimate a 100bp increase in interest rates could lead to a SGD 542m increase in net interest income. However the actual number could be 30-40% less as higher interest rates could see migration of deposits from CASA to fixed deposits.