Singapore Banks - Differentiating Returns

Retain Cautious Industry View: While fundamentals are less bad, we see no reason to expect a sharp snap back in global growth. This makes Singapore vulnerable given its small, open economy and lack of domestic story. Our concerns over asset quality remain – credit cycles usually last at least two years and Singapore is still optimistically pursuing its over-build. We also have the inflation debate and US debt concerns. We missed this strong bounce, but from the risk reward on offer today, we see no reason to be more constructive on the sector. Moreover, with limited meaningful growth/ return options outside of Singapore, the sector looks to be headed back to the low return/ low growth phase.

Re-visiting return/ earnings power: Since 2001, the sector RoE has averaged 11.5% and peaked in FY07 at 13.3% with buoyant investment market related fees, wide margins and very low loan loss charges – the zenith of the global debt super cycle. Looking forward we see two years of elevated credit charges, as the recovery in growth is weak and troubled, and lower normalized RoEs with a less buoyant global economy. RoEs look set to trough at around 6% in FY10e.

Upgrade UOB to Equal-weight: Our analysis showed a structurally higher and more stable return profile – mean RoE of 12% with a standard deviation of 1%. We assess normalized RoE at 12%, 2% pts better than peers. UOB deserves a premium rating. Rudimentary investment arithmetic suggests 1.7x book vs 1.3x for DBS/ OCBC. We see UOB as a structurally higher return franchise less reliant on low quality investment markets.

DBS and OCBC remain Underweight: Our analysis showed structurally lower and more volatile return profiles. We assess normalized RoE at 10% for both banks. Lower core return power means a higher reliance on lumpy investment gains and very low loan loss charges … low quality and higher risk best suited to the halcyon days of the global debt super cycle.

Target prices increased for a reduction in the recession/ credit cycle discount: However, no change to earnings estimates. Asset quality remains critical.

DBS: TP - from S$8.00 to S$9.50
OCBC: TP - from S$4.10 to S$4.60
UOB: TP - from S$9.50 to S$12.50

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