Singapore Banks

Kim Eng on 30 Oct 2012

Maintain Underweight. Bank stocks have done well thus far, with the FSTFN (FTSE Straits Times Financials Index) up 28% YTD vs FSSTI’s 16% gain. This undoubtedly flies in the face of our Underweight on the sector, but as it stands, our call has been a macro one and we continue to believe that headwinds will continue to buffet the economy, increasing risk to banks’ earnings amid a challenging environment. A near-term bounce in share prices is likely due after recent sell-offs but we would recommend that investors continue to lighten their load and maintain our SELL calls on UOB and DBS, and HOLD call on OCBC. 

Reporting starts. DBS kicks off the 3Q12 season with its results release on 1st Nov. This will be followed by UOB and OCBC on 7th Nov and 9th Nov respectively. Our current forecasts assume an aggregate 4% QoQ dip in 3Q12 earnings, but YoY growth would still be a decent 16%. This would lift aggregate 9M12 growth to 16% YoY as well. We expect NIMs to compress domestically on higher funding costs, while regionally, OCBC and UOB could see NIM pressure in Malaysia. We think UOB’s non-interest income may come in weaker in 3Q after two particularly strong quarters, and thus expect a larger 7% QoQ decline in 3Q earnings vs -2% QoQ for DBS and -4% for OCBC.

Challenging. Latest economic data point to a sluggish economy buffeted by exogenous factors, with the IPI in Sep contracting YoY & MoM for the second consecutive month. On the operating front, persistently low interest rates will likely cap any improvement in NIMs while loan growth domestically is likely to continue slipping, particularly as the impact from recent mortgage rulings begins to filter through.

Economic fundamentals still have a bearing on share prices, in our view, despite distortions from strong liquidity flows. We find a high 0.75x correlation between the YoY change in the IPI (3-month moving average) and the YoY change in the FSTFN (moved 3 months forward). This is indicative of a still strong relationship between Singapore’s economic fundamentals and movements in the financial index.

Valuations wise, Singapore banks trade at a prospective P/BV of just 1.2x, but this is very much reflective of the low 11.3% ROE that we project for 2013. 2013 average PER of 10.7x is just slightly lower than the ASEAN ex-Singapore average of 11.2x, despite earnings growth of just 6.1% in 2013 (down from 10.2% in 2012) vs 14.5% for the regional banks. Dividend yields of 3.8%-4.0% for this year are decent but a higher premium is warranted, in our view, given the risk of higher volatility to earnings ahead.