Singapore Banking Sector: Turning the corner

Better set of results. Overall, 2Q09 results were better than expected. OCBC’s strong results were driven by higher non-interest income and lower specific provisions. UOB’s results were mildly better than expectations but still dragged by higher collective impairments. DBS’ results were also above street estimates. All banks declared interim dividends.

Sentiments improving. We gather that loan demand is back. Positive signs in the rejuvenation of housing loan demand were apparent in the Jun-09 banking stats where housing loans grew by 4.1% YTD. We also note that loan spreads for the corporate and SMEs have peaked while loan rates for consumer loans, especially housing loans, remain competitive. Specific provisions are starting to trend down although NPL ratios may still inch up. However, we believe the worst of spiking NPLs are over. We expect NPL ratio to peak at 3% for FY09. Capital ratios for banks remain robust.

Pegged to mid-cycle valuations; further upside depends on sustainability of capital markets and clear signs of macro recovery. Our target prices are still pegged to mid-cycle valuations based on FY10 book value. Further upside to our valuations would depend on the recovery in book values as credit market normalizes. Our preference lies with UOB as its valuation lies in the recovery of its book value. In the longer term, UOB’s ROE stacks up better than its peers. Maintain Buy for UOB with TP at S$18.60. Meanwhile, we have a Hold call for OCBC with TP at S$8.00 as we believe most good news have been priced in.

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