OCBC reported 1Q09 net profit of S$545m, down 12% YoY. This is higher than our expectations due to the strong profit from life assurance (+S$259m YoY)(largely non-recurring) and provisions coming in below our expectations. Excluding GEH, core net profit was down 24% YoY to S$348m.

Loan recorded sequential contraction. Net interest income was strong, rising a sterling 16% YoY to S$740m, primarily due to the 25bps YoY NIM widening to 2.42%. Whilst average interest earning assets was up 4.9% YoY, it fell 1.7% QoQ, pointing to recent loan retrenchments. Loan contracted 1.2% YTD, and we forecast 2009 loan contraction of 4.2%.

Life assurance profit surged. Non-interest income rose 12% (or S$63m) YoY to S$607m, with the S$259m YoY increase in life assurance profit being the main driver (of which S$201m is non-recurring), and partially offset by a one-time S$167m divestment gain in 1Q08 (no similar gains in 1Q09). Fee and commission income was lacklustre, as expected, falling 27% YoY. This was due to weakness in wealth management and brokerage income.

Sharply lower expense-income ratio. Operating expenses fell 3% YoY to S$413m. Excluding one-time items, expense-income ratio fell to 30.7%, from 1Q08's 42%, particularly due to the strength in life assurance profit. Allowances of S$197m was a reversal from 1Q08's write-back of S$8m.

We raise our FY09 net profit forecast by 22% to S$1.42b. This is due to 1) strong 1Q09 life assurance profit; and 2) our raising of FY09 NIM assumption by 24bps to 2.35%. Our FY09 recurring net profit forecast is, however, raised by a smaller 7%. Our FY10 net profit forecast was also raised by a marginal 3%.

Maintain NEUTRAL. We raise our target price from S$5.00 (based on 1.1x 2009 book) to S$6.20, pegged to 1.3x 2009 book. This factors in the general market expectation that the worst of the US economy is behind us.