Ready to Sing- upgrading price targets, UOB to Buy

Despite recent share price strength, we see further upside from current levels. A more benign economic outlook suggests earnings upside in '10e and beyond, on improved revenues and falling loan losses. This is only partly captured by our 5-6% EPS upgrades. And given our analysis of historical trends suggests 20%+ upside to current valuation multiples, we think investors should be overweight the sector. DBS is our key Buy (23% TR upside) while we also upgrade UOB to Buy (18% TR upside) with price targets raised across the sector.

Our analysis of historical trends indicates Singapore banks tend to deliver strong absolute and relative share price performance in the year following a trough in GDP growth. The sector typically trades at a premium to average PB and PE multiples post recession, reaching an average 1.9x within one-year post downturns in 1998 and 2001, roughly 27% above current levels. In PE terms, while the premium to average is less pronounced (5% above 15.7x ave. post3Q98 and 3Q01 trough) this still represents 18% upside from the current sector PE of 13.9x.

With the fall in equity markets reducing total sector income by 5% in 2008 we see scope for revenues to rebound materially as a result of improving market conditions. And our analysis suggests loan losses should normalise rapidly as the economy recovers. Within 2-3 years of the 3Q98 and 3Q01 GDP troughs Singapore loan loss rates fell to 16bps and 19bps respectively, well below the 45bps sector’s 2000-08 average (69bps 2008) . Applying the 45bps average rate to 2010e loan forecasts implies earnings 16-22% above our previously published estimates. This upside is partly captured by our 5-6% upgrade to 2010e EPS across the board, but still implies a further 10-16% EPS upside should loan losses return to average levels. And given loan loss rates typically ‘overshoot’ average levels as the cycle matures, medium term EPS benefits could be even greater.

TP’s raised for DBS ($16.50 from $14.50), OCBC ($8.10 from $5.80) and UOB ($20.30 from $14.50). Valuation based on Gordon growth model with COE 7.5% and terminal growth 2% revised up from 0.8% to better reflect long term GDP growth prospects. We now base ROE assumptions on explicit three-year forecasts, compared to previous methodology which reflected estimated sustainable ROEs. Note book value estimates exclude the benefit of unrealised revaluation gains. Key sector downside risks are a downturn in investment markets adversely impacting market-sensitive income, and worsening asset quality as a result of a worse-than-expected global economic slowdown. Key upside risk for OCBC is if there is a further narrowing in CDS spreads, driving higher book values (details pp 14-16x).

Click here for more Banks and Financial Institutes Technical Analysis

Sponsored Links

Related Posts by Categories