This year, it has so far been the only local bank to make a major acquisition, buying ING Asia Private Bank for $2 billion earlier this month.

 

Today, its 3Q09 results for the three months to Sept 30 beat analysts’ estimates on the back of better non-interest income. It reported a net profit of $450 million.

 

“They were above expectations,” says Winston Lum, an analyst at AmFraser Securities who had expected flat q-o-q net interest income.

 

Indeed, net interest income was flat y-o-y and down 3% q-o-q to $684 million. Loans growth was also flat y-o-y and down 2.9% q-o-q. Fee income was down. Provisioning fell sharply, down 67% y-o-y and 50% q-o-q. However, OCBC sparkled on its trading income.

 

“Non-interest income surprised on the upside lifted by higher life assurance profits, trading income and gains on investment securities,” noted a DBS Research note. DBS has maintained a neutral rating for OCBC for the time being but will be revising its earnings estimated for this year. Its net profit of $450 million was up 12% y-o-y but down 3% q-o-q.

 

DMG & Partners has raised its target price to $7.50 from $7.30 to factor in stronger earnings growth prospects following the acquisition of ING Asia Private Bank. “This new target price is pegged to 1.4 times 2010 book. OCBC remains neutral,” DMG’s update states.

 

It wasn’t just the bank that surprised on the upside. Its insurance unit Great Eastern Holdings also reported a better-than-expected result for third quarter. According to the Credit Suisse results review, its 3Q09 core profit was an estimated $211 million (2Q: $100 million) was achieved on the back of a strong non-par profit performance.

 

The redemption of its CDO-related GreatLink Choice structured product from investors led to a one-time loss of $213.3 million, or $177 million net of tax. Non-par profit doubled in 3Q09 to $163 million, due to the impact of normalising credit markets on the fixed income portfolio and, to a lesser extent, rising equity markets. Premium sales jumped 44% q-o-q to $1.8 billion, benefiting in part from GLC redemption monies being reinvested, as Credit Suisse points out.

 

Great Eastern’s capital adequacy ratios in both Singapore and Malaysia exceed 200% (minimum regulatory ratio of 120–130%). Credit Suisse has revised up its 2009 net profit estimate by 45% to reflect the better-than-expected insurance profits year to date and it has raised its 2011 profit estimate by 5%. “We have raised our target price to $15.41 (from $12.84). Our new target price is based on an estimated appraisal value using an historical average new business multiple of 7.5 times (compared to our previous method of assigning a post-Asian crisis low price to embedded value of 1.05 times),” says Credit Suisse. It has upgraded Great Eastern to “outperform” because its target price implies an 18% upside.

 

For the other two banks, Lum of AmFraser expects DBS Group Holdings to also gain market share in the housing loans sector “given that it has been quite aggressive in terms of pricing in the mortgage market over the last few months”. Meanwhile, United Overseas Bank could be the biggest beneficiary of a better market.

 

“With the continued recovery in capital market prices after June 2009, we would expect to see positive marked-to-market adjustments for the banks’ available-for-sale portfolios in 3Q09,” Lum writes in a research report.

 

“Note that any positive mark-to-market adjustments to the banks’ available for sale portfolios (AFS) — in the case of UOB, which will be marked-to-model — would be made as a direct adjustment to equity and will help boost book values. UOB could possibly be the biggest beneficiary as it has the largest proportion of its AFS portfolio in equities and bonds (UOB: 60.2% as at December 2008 versus slightly more than 40% for the other two local banks),” he explains.

 

Lum has an overweight recommendation for all three banks. UOB reports results this Friday and DBS on Nov 6. 

 

The 45-point decline to 2,649 today takes the STI to its flattening 50-day moving average which is also at 2,649. The STI has skimmed its moving average this year, in July. The trend has not been broken yet, but annual momentum surged to a resistance this week and has retreated from that level. The higher it goes, the more vulnerable the STI is to a top formation. 

 

Furthermore, property stocks which had started forming top formations earlier this month are still within those reversal formations. As of now, there is nothing to negate the topping-out process.

 

The STI really needs to rebound this week to maintain its upward momentum. Meanwhile, some lower liners have already succumbed to breakdowns. This is a time to tread the market with extreme caution. Once again, 2,700 remains a formidable resistance.