OCBC Bank Limited:Battening down the hatches

　　How do we view this?

　　Loans declined but a balanced performance across its segments. OCBC’s customer loanbook declined 1% yoy led by General Commerce loans, Manufacturing loans and Transport,storage and communication loans. The decline was partially offset by continued growth bya broader selection of loan segments. We think that the performance profile of loansegments are more balanced and are not overly reliant on strong performance by a coupleof segments.

　　Deposits weaker owing to weaker loan demand. Demand for loans have weaken and aspart of the asset liability management, deposits has correspondingly declined. Particularlyfor USD loans which have weaken in 1Q16. Total deposits fell 4.7% yoy. Fixed deposits (FD)fell %5.9 yoy partially offset by Current and Savings Account (CASA) which grew 5% yoy.

　　Management would not be aggressive in competing for deposits. This is in line with ourexpectations that OCBC should maintain LDR between 83% to 85% under a weak yetcompetitive lending and deposits market in 2016.

　　NIM expansion of 13bps yoy and 1bps qoq driven by discipline to price risk accurately.

　　The NIM expansion was driven increase in loans gross yield because of discipline to priceloans according to risk of the borrower. Management had eschewed compromising loansgross yield to gain market share and this may continue for FY2016. Management hasimproved their guidance for NIM in FY16 from 1.7% in 4Q15 to 1.75% in 1Q16.

　　Loan book performance undesirable either in rising or declining interest ratesenvironment in the short-term. Macroeconomic sentiments have become less dire justafter the beginning of 2016 and SIBOR/SOR moved lower. As a result, prices of loans willexperience an upper bound limit that caps margin expansions. On the other hand, a rise inSIBOR/SOR rates, though favourable for NIMs expansion has been in the last year, anoutcome of global economic imbalances such as expectation of FED rates hikes and risk ofcapital outflows.