With the cautious mood for economic recovery and corporate activities, earnings growth projections are modest, with the street expecting both DBS and UOB to post average earnings growth of 3% in 2013. We are going for almost 6% growth, and expect earnings could possibly surprise on the upside when business activities pick up further in 2H 2013. We have an Overweight for the sector. The FTSE ST Financials Index (FSTFN) has outperformed this year, up 31% so far till Nov 2012, versus the STI’s gain of 16%. Valuations for the banks are undemanding at current price levels and we continue to have medium term BUY ratings for both DBS [BUY, Fair Value of S$15.94] and UOB [BUY, Fair Value of S$21.30].
Banking – A sector poised to surprise on the upside
With the cautious mood, we believe that most of the negatives have been priced into the stock prices of the local banks, and there is a strong likelihood that the banks could exceed expectations in 2013. We are going for average earnings growth of 5.5% in 2013 for both banks under our coverage, DBS and UOB, and the street is going for growth of only 3.3% (based on estimates from Bloomberg), effectively pricing in almost flat growth in 2013. However, with the more optimistic Purchasing Managers Index (PMI) and improving economic numbers, there is a good likelihood of better earnings, especially in 2H 2013.
Overweight the sector – entering 2013 on firmer footing
Despite the still lingering issues from 2011-2012 carrying into 2013, especially the European debt situation and the slowdown in the US, we believe that the local banks are entering into 2013 on firmer footings and are well positioned to differentiate from the US or European banks, with earnings growth, albeit modest in 2013, as well as strong balance sheets. The weakness in margin and slowing loans growth have already been discounted in both earnings projections for 2013 as well as in the current share prices. Asia remains the core base for the three banks, and there are still opportunities to cross-sell and leverage on their existing products and services, translating into better fee and other income. We expect corporate activities to also pick up in line with the more optimistic outlook.
BUY for both DBS and UOB
The worst appears to be over for most key economies, although full recovery could take longer than expected. We see increased optimism, and expect business activities to rise in tandem. The FTSE ST Financials Index (FSTFN) has outperformed this year, up 31% so far till Nov 2012, versus the STI’s gain of 16%. Valuations for the banks are undemanding at current price levels and we continue to have medium term BUY ratings for both DBS [BUY, Fair Value of S$15.94] and UOB [BUY, Fair Value of S$21.30].
With the cautious mood, we believe that most of the negatives have been priced into the stock prices of the local banks, and there is a strong likelihood that the banks could exceed expectations in 2013. We are going for average earnings growth of 5.5% in 2013 for both banks under our coverage, DBS and UOB, and the street is going for growth of only 3.3% (based on estimates from Bloomberg), effectively pricing in almost flat growth in 2013. However, with the more optimistic Purchasing Managers Index (PMI) and improving economic numbers, there is a good likelihood of better earnings, especially in 2H 2013.
Overweight the sector – entering 2013 on firmer footing
Despite the still lingering issues from 2011-2012 carrying into 2013, especially the European debt situation and the slowdown in the US, we believe that the local banks are entering into 2013 on firmer footings and are well positioned to differentiate from the US or European banks, with earnings growth, albeit modest in 2013, as well as strong balance sheets. The weakness in margin and slowing loans growth have already been discounted in both earnings projections for 2013 as well as in the current share prices. Asia remains the core base for the three banks, and there are still opportunities to cross-sell and leverage on their existing products and services, translating into better fee and other income. We expect corporate activities to also pick up in line with the more optimistic outlook.
BUY for both DBS and UOB
The worst appears to be over for most key economies, although full recovery could take longer than expected. We see increased optimism, and expect business activities to rise in tandem. The FTSE ST Financials Index (FSTFN) has outperformed this year, up 31% so far till Nov 2012, versus the STI’s gain of 16%. Valuations for the banks are undemanding at current price levels and we continue to have medium term BUY ratings for both DBS [BUY, Fair Value of S$15.94] and UOB [BUY, Fair Value of S$21.30].
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