Singapore Financials Strategy - How Much 2Q09 Results Upside Is in the Price?

Banks, STI closing in on mid-cycle P/B levels: Our investment case for the banks is that Singapore will return to positive yoy GDP growth by 4Q09, so banks (and the STI) should normalize toward mid-cycle P/B levels. A rally of c.20% in 3 weeks has brought the banks (and STI) close to those mid-cycle P/B values. While we expect 2Q09 results (out first week of August) to surprise a bearish consensus on the upside, prices already may be factoring in strong 2Q results. If Singapore can pull out of recession in 3Q09, and the banks deliver 2Q numbers ahead of our above-consensus forecasts, then the recent rally might be sustained.

2Q09 results—consensus too bearish: Bloomberg consensus estimates for 2009E remain bearish on the earnings prospects for the 3 Singapore banks, implying a quarterly profit trend that is flat or lower than what was reported by the 1Q09 results. We see upside surprise for 2Q in two main areas: lower provisions as the NPL cycle appears to be far more benign than first thought, and a lift to book value/share from positive revaluation of AFS investments. We predict 2Q profits of DBS S$470m (+8%qoq), OCBC S$400m (+8%qoq vs. 1Q recurring profits) and UOB S$460m (+12%qoq). UOB should see the most AFS gain and BV/S lift.

Bank price rally may have factored in stronger 2Q expectations: With the banks closing in on our price targets (UOB surpassing), we believe the market is already factoring a strong 2Q earnings performance, particularly for UOB and to a lesser extent DBS. Our analysis suggests that if our 2Q forecasts are achieved, they are being priced in PER terms at the +1SD level for UOB and DBS, and at the +1SD P/B level for UOB. Only OCBC would be trading closer to mean PER and P/B levels based on Citi's 2Q09 profit estimates.

Singapore Exchange (SGX)—4Q09 (June) forecast profit S$89m (+61%qoq): From a cycle-low Mar 2009 qtr net profit of S$55.3m on ADT of S$900m/day, we expect 4Q09 (June) results to reach S$89.3m (annualized EPS: S$0.34) driven by the recent surge in May ADT to S$2.1bn. We expect the ADT for the June quarter to reach S$1.7bn/day, or near double that of the previous quarter.

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