Can Singapore banks achieve post-Asian financial crisis peak P/Bs again?

In May 2007, just before the credit crisis struck, Singapore banks traded at post-Asian-financial-crisis high P/B multiples (DBS 1.9x, UOB/OCBC 2.2x). In a detailed report, we analyse whether Singapore banks can reach those valuation multiples again.

To achieve those multiples again, DBS would need an ROE of 12.8% (CS 2011 forecast 10.2%), UOB 13.2% (CS 12.9%) and OCBC 12.2% (CS 11.0%) using Gordon Growth. So, even in 2011 (a “normalised” year), banks may not reach their recent peak P/B.

Although Singapore banks are enjoying some of the strongest consensus earnings upgrades among the Asian banks, 2011 profits are projected to be only marginally ahead of 1H07 (annualised).

We find bull-case ROEs in 2011 could be 1.5% higher than our base case. In that case, DBS would still fall short of the 12.8% needed to reach 1.9x P/B, while UOB/OCBC would be comfortably ahead.

UOB remains our top pick; while DBS should perform well when rates start rising. UOB is the highest ROE bank in Singapore and has built a sustainable 200-300 bp ROE lead over peers.

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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.

DBS - May He Be The Right Choice

DBS has appointed Piyush Gupta as its new CEO. (It is no surprise that none of the oft-touted local candidates was the chosen one.)

Gupta, a Singapore PR, is a 27-year veteran in the banking industry, of which 8 years were spent here, briefly as Citi’s Country Head. He was also country head for Malaysia (2002-2007) and Indonesia (1998-2000). He is currently CEO for Citigroup’s South East Asia Pacific, including Australia, New Zealand and Guam.

We do not expect the market to react materially one way or the other, to Gupta’s appointment. (DBS’ share price had recovered to around $12.90 yesterday before the announcement, from $12.64 the day before. It hit $13 but ended at $12.72.)

All his predecessors over the last 10 years - from John Olds, P Paillart, Jack Tai, to the late Richard Stanley were veteran bankers, from JP Morgan and Citibank, and with different expertise, eg Jack Tai, an investment banker, when the Bank had IB ambitions, and with a good grounding in optimal capital structure; Stanley for his intimate knowledge of Hong Kong / China, particularly important with the rising importance of China, and after the acquisition of Dao Heng Bank 8 years ago, and which has yet to produce the “desired” returns. (Gupta unfortunately lacks this exposure, even though he had spent some time in HK.)

After all the hustle and bustle, it will be down to execution, to maintain DBS as one of the strongest financial institutions in the region. We maintain BUY.