Singapore banks

Maybank Kim Eng Research, June 11

UOB benefits from woes affecting peers. Contrary to market expectations, UOB's share price continued to outperform even after posting the weakest Q1 2014 results among the three banks we cover.

YTD, UOB's share price has risen by 7.1 per cent which compares favourably to that of DBS (-0.1 per cent) and OCBC (-4.3 per cent) and the benchmark Straits Times Index (+4.2 per cent).

In our view, UOB's share-price outperformance can be attributed to:

- Reduced appetite for a more aggressive OCBC. The execution risk related to the acquisition of Wing Hang Bank has made investors turn cautious toward OCBC. This has put UOB in a positive light, reinforcing the perception of it being a safer investment bet.

- Smallest exposure to Greater China. The market's discomfort over significant Greater China exposure has reduced the investment appeal of DBS given its largest exposure to that region.

In our view, UOB's share-price outperformance is unlikely to reverse for the rest of this year because:

- UOB's relative P/BV valuation to DBS and OCBC remains modest from a historical standpoint.

- In the case of OCBC, management's allusion that Wing Hang Bank is a long-term acquisition suggests it would be sometime before the market recognises the benefits of the acquisition. Until then, we expect the overhang to remain.

- With Greater China being a key driver of DBS's prospective earnings, lingering concerns over shadow banking and the spectre of a weaker economy in China, DBS's share price may struggle in H2 2014 until there are clearer signs that short-term interest rates are on the rise.

However, UOB's outperformance could reverse when there are clear signs that short-term interest rates are on the rise. This is because among the three Singapore banks UOB has the weakest deposit franchise. We do not expect higher interest rates until mid-2015.

As H2 2014 approaches, we now roll over our valuation base year to mid-2015.

To derive the mid-2015 earnings, we use the average earnings for FY14E and FY15E.

With the exception of DBS, the fair value multiples assigned to UOB and OCBC are left unchanged.

In the case of DBS, we now ascribe a lower fair P/E multiple of 13 times (from 14 times) to reflect potential risks owing to its greater dependence on Greater China.

At 13 times P/E, DBS is priced at its rolling P/E mean since May 2005. Our revised TPs are:

- $20.70 for DBS (previously: $20.30),

- $25.70 for UOB (previously: $24.30), and

- $9.63 for OCBC (previously: $9.22).

We reiterate our "overweight" stance on the banks sector.

DBS is our top pick as it is best positioned to take advantage of a rising interest rate environment. UOB is our second choice. We would stay cautious on OCBC.

SECTOR - OVERWEIGHT