OCBC is Singapore's second largest bank by group assets (S$183.6bn as of Sept 2008). Its primary business focus is Singapore (67% of profit before tax) and Malaysia (25%), but in recent years OCBC has made investments inIndonesia, China and Vietnam. OCBC is a balanced corporate, SME and consumer bank, with a leading position in life insurance and public housing ("HDB") mortgages, plus an orientation towards the mass market consumer.

We are negative on all the Singapore banks given our bearish view on the Singapore economy. We have a Sell/Low Risk rating on OCBC, with a target price of S$4.80 (from S$6.00). OCBC continues to deliver robust top-line net interest income, and management remains confident on margins and asset quality. However, the strength of 2007 earnings was markets-related income, and present markets volatility is causing earnings uncertainty for OCBC . Present low provision charges may also be at risk as the downturn deepens.

Our target price for OCBC is S$4.80. (1) Using a dividend discount model (DDM), assuming a 2009E net DPS of S$0.29, cost of equity of 10%, and a long term growth rate of 3.9%, gives a fair-value P/E of 10.1x 2009E, which when applied to our 2009E EPS of S$0.47 derives a fair value of S$4.80, which equates to a 2009E P/B of 1x (vs. 10.1% ROAE). We use DDM as a primary valuation tool, as we view it reflects sustainable earnings, dividend growth and excess returns relative to cost of equity, and also factors in liquidity/sentiment impact on valuations. It is also consistent with the methodology underpinning our P/E investment cycle analysis framework. (2) Using our P/E cycle analysis, which suggests an average trough-peak P/E range for the Singapore banks of 11-18x (for OCBC 12.4-17.6x, average 15.0x) on one-year forward consensus estimates, our target price PER of 10.1x is below the trough of the range for OCBC.

We rate OCBC Low Risk to reflect the capital strength and financial regulation of the Singapore bank sector. This is in-line with our quantitative risk-rating system, which tracks 260-day historical share price volatility. Potential upside (and downside) risks to our target price include: 1) the extent of impact of the US/global economy on Singapore's domestic economy and job growth; 2) the level of short term interest rates and shape of the yield curve (generally lower S$ SIBOR is at the margin positive for OCBC, and conversely); 3) changes to the asset quality position of the bank and in turn provision charges; 4) market liquidity risk appetite; and 5) dividend policy and capital management. These risks could impede the stock from achieving our target price.