Singapore banks are in a sweet spot; we remain Overweight on the sector The evidence points to the Singapore banks being in a sweet spot of the cycle.
Net interest margins (NIMs) in Singapore look set to rise over the next few years. Loan growth continues to hit new highs. We continue to believe that it is too early
to be concerned about asset quality. The Singapore banks are a great defensive
investment in these uncertain times, and we reiterate our Overweight rating on the sector. Our top picks remain DBS and OCBC.
Deutsche Bank AG/Hong Kong
Industry Analysis
Top picks
DBS Group Holdings Ltd (DBSM.SI),SGD18.86 Buy
OCBC (OCBC.SI),SGD8.17 Buy
United Overseas Bank (UOBH.SI),SGD18.62Buy
Companies featured
DBS Group Holdings Ltd (DBSM.SI),SGD18.86 Buy
2007A 2008E2009E
P/E (x) 14.6 10.7 9.5
Div yield (%) 3.2 4.6 4.8
Price/book (x) 1.6 1.3 1.2
OCBC (OCBC.SI),SGD8.17 Buy
2007A 2008E2009E
P/E (x) 13.4 11.311.2
Div yield (%) 3.2 3.7 4.3
Price/book (x) 1.7 1.5 1.4
United Overseas Bank (UOBH.SI),SGD18.62Buy
2007A 2008E2009E
P/E (x) 15.6 13.111.5
Div yield (%) 4.1 3.9 4.4
Price/book (x) 1.8 1.7 1.6
S'pore banks target prices & upside Company Target price Upside
DBS S$25.60 36%
OCBC S$11.00 35%
UOB S$23.50 26%
Related recent research Date
DBS: Worried about inflation? Buy DBS
Michael Chang 17 Jun. 2008
Singapore banks: Entering uncertain times - Deserving
a premium for low-risk
Michael Chang 13 Jun. 2008
Singapore banks: Timing that sweet spot
Michael Chang 02 Jun. 2008
OCBC: Watch for an earnings upswing and capital
benefits
Michael Chang 27 May 2008
DBU loan growth accelerates; ACU loan growth decelerates
Domestic Banking Unit (DBU) loan growth continues to defy expectations of a slowdown and has even accelerated to new highs, up 26% in May-08 YoY
(compared with 24% YoY in Apr-08). Asian Currency Unit (ACU) loan growth looks
like it has peaked, and is currently at 35% YoY as of May-08 (vs. 41% YoY in Apr-
08). As DBU loans comprise 69-94% of the banks’ loan books in Singapore, we
are very confident that 2008 will be at least the second strongest year for loan
growth at Singapore banks since the Asian crisis. Business lending growth (up 38% YoY) continues to be the driver of DBU loan growth. Growth is sufficiently diversified across industries, with >20% YoY growth common. Consumer loan growth remains solid and is up 13% YoY. The fixed deposit/ total deposits ratio
continues to fall (45% as of May-08), while the loan-to-deposit ratio continues to rise (77% as of May-08). Both these trends are favourable to NIMs.
SME loan growth is on a sharp upward trajectory While large corporate loans still continue to drive loan growth in Singapore (up 41% YoY as of May-08), it is also increasingly clear that SME loan growth is
mirroring the sharp upward acceleration of large corporate loan growth, as it is up 27% YoY. Our analysis also indicates that SME loan growth may even have been
stronger, if not for the strong large corporate loan growth creating a ‘crowding
out’ effect on the supply of funds available for SME loans. Corporate loan spreads are definitely rising in Singapore
Large corporate loan spreads are definitely rising in Singapore, with the rise
seemingly greatest for SGD loans. In addition, our analysis indicates that s35 limits may be one reason why corporate loan spreads are rising faster in the building and construction industry. We believe this would benefit OCBC the most out of its peer group.
DBS and OCBC are our top picks - 36% and 35% respective potential upside
The Singapore banks are valued at an (ROE-g)/ (COE-g) basis. Our sustainable ROE
assumptions are 12.9% for DBS, 13.0% for UOB, and 13.4% for OCBC. Our COE
assumptions are 7.3% for DBS, 6.7% for UOB, and 6.6% for OCBC. Our long term
growth (g) assumptions are 0.8% for all three banks. Key risks are investment
market volatility and continued negative news flow on global banks, which could
adversely impact the share prices of Singapore banks (see pa
