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Broker's take: Nomura keeps 'buy' on OCBC; loan growth, net interest margin are concerns

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Nomura on Thursday kept its "buy" rating on OCBC, pegging its target price at S$12.20 a share after the bank posted a 11 per cent rise in its first-quarter net profit, surpassing analysts' expectations.

NOMURA on Thursday kept its "buy" rating on OCBC, pegging its target price at S$12.20 a share after the bank posted a 11 per cent rise in its first-quarter net profit, surpassing analysts' expectations.

At 3.50pm, OCBC was trading around S$10.64 each, down 24 cents, as its shares began trading ex-dividend. More than seven million shares changed hands.

Early Thursday, OCBC reported a net profit of S$993 million for Q1. This was 7 per cent above Nomura's estimate and 12 per cent ahead of the street.

"The difference between the actual and ours was mainly due to stronger non-interest income and lower provisioning,'' Nomura said.

"OCBC's loan growth of 0% q-q and a NIM (net interest margin) decline of -5bp q-q were surprises. We think the market will be concerned with the low loan growth and NIM relative to its local peers.''

The loan growth was up 20 per cent from a year ago and flat quarter on quarter. The year-on-year increase is primarily driven by the consolidation of Wing Hang loans. Excluding the consolidation, the loan growth would be 3.6 per cent from a year ago and this was driven by mortgages and other property-related loans.

OCBC's net interest margin of 1.62 per cent was 8 basis points lower than a year ago and 5bp less than the preceding quarter. The decline was attributed to lower loan-to-deposit ratio and the parking of the excess liquidity in lower-yielding financial assets.

Nomura noted that the bank's management expects some improvement over the coming quarters as some of the liquidity is redeployed from the financial assets to higher-yielding loans and also from possible reduction in the excess liquidity.

"While management has guided for a stronger NIM in 2Q, it is however not projecting the NIM to return to 4QFY14's level,'' Nomura said.

The bank is now guiding for mid-single digit loan growth for 2015, versus the earlier guidance of high single digits. The revision is primarily because of slower growth in domestic Singapore. Management indicated that there were no significant infrastructure projects to fund in Singapore.

"We believe the narrowing of the onshore and offshore Chinese interest rates has also reduced the opportunities for lending to the Chinese companies,'' Nomura said.