OCBC to suffer mortgage risks from property price pullbacks

Earnings forecast dipped by 1-6%.

According to Nomura, OCBC’s contributions from trading income, insurance related earnings and asset quality have been outperforming expectations this year.

Here's more from Nomura:

We had expected credit costs to average 30bps for FY12F but the current run rate is only 20bps. Trading income and the profit from life insurance also outperformed at 0.8% of liquid assets (vs historical average of 0.4%) and 1.3% of life insurance assets (historical average of 1.0%) respectively.

Offsetting the positive surprises was a weaker loan growth of 9% while NIMs have been lower than earlier thought. Going forward, however, we lower our FY13-14F net profit by 1-6% due to a more conservative loan growth and NIM outlook while trading income/insurance earnings return roughly to historical trend levels.

We expect a loan CAGR of ~8% while NIMs are forecast to fall about 4bps over the next 2 years to 1.69%. The weaker NIM is in anticipation of continued loose monetary policies globally.

Credit costs are currently near their cyclical lows and we have factored in an increase in the charge-off rate to 27bps by FY14F from ~20bps currently. Corporate gearing levels in Asean appear to be relatively healthy but in Singapore, our property analyst highlights the risk of a pullback in property prices which would pose a risk to investment property mortgages (estimated at 5% of group total loans).

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