Credit Suisse

Singapore Banks - Overweight

• All three banks intend to hold till maturity (CDOs are typically fiveyear instruments) and categorise them as available-for-sale so that the mark-to-market losses will be reflected in equity, not P&L.
• The ABS CDOs, which contain US sub-prime mortgages, is less than one-quarter of CDOs in DBS and UOB and about four-fifth in OCBC (balance is corporate). Even that is rated investment grade.
• CDOs managed by their asset management subsidiaries are larger, but entirely held by institutional investors who will bear the MTM losses. The AMCs or banks will not bear that loss.
• We believe the CDO scare has created an excellent opportunity to buy. With loan growth accelerating and margins generally holding up, we like all three Singapore banks with UOB as top pick.

Banks. direct CDO exposure is limited and manageable

First Half 2007 Results

 Core net profit for the first six months of 2007 rose by 63% to S$1,028 million. Net interest income grew 28% to S$1,065 million, driven by a 15 basis-point improvement in net interest margin from 1.94% to 2.09% and 19% growth in interest earning assets. Higher fee and commission income, profits from life assurance and net gains from investment securities lifted non-interest income by 47% to S$999 million. For 1H07, non-interest income accounted for 48.4% of the Group?s total income, up from 44.9% in 1H06.

Second Quarter Revenues

Interim Dividends

The net dividend for 1H07 is 27% higher than the 1H06 dividend (11 cents tax-exempt) and 17% above the 2H06 dividend (12 cents tax-exempt). The dividend payout will amount to an estimated S$432 million, or approximately 42% of the Group?s core net profit of S$1,028 million for 1H07.

Core earnings exclude one-time gains from the divestment of non-core assets (S$90 million in 1Q07 and S$482 million in 2Q06) and tax refunds (S$15 million in 2Q07 and S$47 million in 1Q07). Including such gains and tax refunds, reported Group net profit was S$532 million for 2Q07 and S$1,179 million for 1H07, and annualised earnings per share for 1H07 was 76 cents.

OCBC Group Reports Second Quarter Net Profit of S$532 million

Core net profit rose 65% year-on-year to S$518 million

Interim net dividend of 14 cents per share

In response to queries from the media, analysts and investors, OCBC Bank would like to provide some clarity on the Group?s exposure to collaterised debt obligations (?CDOs?).

Bank?s Exposure

The Bank (excluding its subsidiary, Great Eastern Holdings, and GEH?s subsidiary, Lion Capital Management) has investments of US$430 million or approximately S$650 million in CDOs. These CDOs are intended to be held to maturity, with some investments dating back to 2003.

The current rating profile of the CDO portfolio is as follows: 21% - AAA, 22% - AA, 46% - A and 11% - BBB. Of the US$430 million CDOs, US$181 million are invested in ABS (?assetbacked securities?) CDOs and the balance in corporate CDOs. The ABS CDOs have a diversified portfolio of underlying ABS assets, including a portion of US sub-prime mortgages. Seventy-five percent of the ABS CDOs are High Grade ABS and 25% are Mezzanine ABS. The Mezzanine ABS investments are either A or AA rated tranches.

Under the current uncertain market conditions, the Bank continues to monitor the portfolio closely but has no intention to liquidate any of its CDOs. To-date, the portfolio is performing and there have been no ratings downgrades on any portion of the portfolio. Under the accounting treatment, mark-to-market changes in the Bank?s CDO portfolio are reflected in ?fair value reserves? under the Group?s shareholders? equity. Should the portfolio be assessed to have been impaired in the future, specific allowance will be made which will be recognised in the income statement. Given the size of the portfolio relative to the Bank?s total assets and capital, the Bank does not expect such an allowance, if it occurs, to have a material impact on its earnings or capital.