Singapore Banks

HSBC Global Research, Jan 16

DESPITE only +2 per cent earnings growth, bank stocks rose 5-15 per cent against the Straits Times Index, which was flat in 2013. PE multiples expanded to 12 times as of end-2013 from 11.6 times a year ago. The performance can be attributed to resilient earnings and what we surmise as hope of better earnings ahead and reversion to mean PE multiples.

EPS growth will drive stocks in 2014. With 2014 earnings growth expected to be modest as loan growth and fee income moderate, it is difficult to imagine further PE multiple expansion. Stock prices will be dictated by EPS growth in 2014. We are expecting only 5 per cent earnings growth in 2014 after baking in blue-sky scenario assumptions for non-interest income, operating cost and credit cost.

The sector is now trading at 1.2 times 2014 book value (BV) and 11 times 2014 EPS. Key risk to our view is net interest margin (NIM) expansion, but we see this as minimal as it will depend on rising short- term interest rates.

DBS remains as our top pick. Despite outperforming in 2013, DBS should continue to do well, given its less demanding 1.2 times 2014 P/B and 11 times 2014 PE multiples.

While we like UOB as a bank, we believe its stock performance will be relatively weaker than DBS, as its ROE profile gradually converges with DBS. Meanwhile, OCBC's performance will depend on its merger and acquisition aspirations.

We lower our 2013-15 core EPS forecasts by 0-5 per cent mainly on lower non-interest income and higher credit costs. Our revised 2013 EPS forecasts imply a sequentially weaker Q4 2013 with core net profit down by 12 per cent/2 per cent/0 per cent q-o-q for DBS/OCBC/UOB. Our 2014 earnings estimates are now 2-8 per cent below consensus. We also lower our target prices to reflect lower sustainable ROEs following the changes to our earnings forecasts.