Here's why OCBC's Q3 profit is under threat

A 7% contraction looms.

According to DBS Vickers, OCBC may post a weaker quarter, but non-interest income may be its saving grace.

Here's more from DBS Vickers:

In Singapore and Malaysia, OCBC had selectively priced up fixed deposits. However, room to price up loans has been limited, and if any, it would have been for
selected corporate loans (both domestic and foreign).

Loan growth is likely to moderate in line with industry trends. GEH’s contribution should improve q-o-q from better non-par profits given improved capital market conditions in 3Q12.

New business premiums and new embedded business value should continue to trend up. We also expect modest growth from its wealth management platform, Bank of Singapore, stemming from its emerging markets business.

We expect provisions to remain benign and NPL ratio to still remain the lowest vs peers.

All in, we expect OCBC’s 3Q12 net profit to contract 7% q-o-q stemming mainly from topline pressure. The expected y-o-y earnings growth is be due to a weak 3Q11 where GEH’s profits were dismal while OCBC booked a S$68m trading loss.

OCBC will record a one-off gain in 3Q12, no special dividend expected. OCBC will record a one-off gain of S$1,153.4m (or S$0.34/share) from its divestment in Fraser & Neave (FNN) and Asia Pacific Breweries (APB).

The transaction was completed in Aug 12. The gain will add approximately 50bps to OCBC’s Tier-1 CAR.

We do not expect a special dividend to be paid from these proceeds. OCBC has stated that the proceeds would be used for re-investment into OCBC Bank’s core financial assets and/or such other purposes as the Directors may consider appropriate.

We suspect these proceeds could be used for inorganic opportunities. It was reported on Bloomberg (5 Oct) that OCBC and CIMB have signed non-disclosure agreements to examine the accounts of Bank of Ayudhya in closer detail.