Singapore banks

Event
􀂃 We expect the Singapore banks’ share prices to remain volatile in the near
term given the fallout from the US sub-prime/CDOs crisis. As a consequence,
we have raised our equity risk premium by 50bp and lowered our target prices
by 1–8% for all banks.
Impact
􀂃 The US sub-prime/CDO issue has taken a toll on the banks’ valuations, more
than offsetting their total exposure, in our view. Unfortunately, this could linger
in the near term.
􀂃 Loan growth momentum looks to be sustained albeit at a slower pace in 2008.
Together with our view of higher interest rates, net interest income is still
expected to grow. Non-interest income will remain a key swing factor and is
expected to be volatile in the short term.
􀂃 Basel 2 implementation could see more excess capital for the Singapore
banks. This would compound their already excessive capital although we
remain hopeful that more dividends could be spun back to shareholders.
􀂃 Risks to our view lie with a broader economic slowdown and further policy
action on the property sector, which could dent the banks’ earnings. In
addition, further CDO provisions could add to this although our view is that it
should range between 2% and 14% of FY07 net profits.
Outlook
􀂃 The sector FY08E P/BV of 1.6x coincides with the historical mean, indicating
mean reversion in light of the recent developments in the US sub-prime/CDO
issue. Near term, we believe such concerns may continue to overshadow the
banks’ share prices.
􀂃 With our assumption of a higher risk premium, we have lowered our target
prices for the banks while rolling over to FY08 book values.
􀂃 DBS Group, beyond the near-term risks on CDOs, continues to stand out with
the most attractive valuation relative to its peers and offers the best upside
even with our revised target price. UOB remains our second pick, with the
added advantage of having the lowest CDO exposure among the banks.
􀂃 Finally, in this period of volatility, we believe the stronger dividend yields
afforded by DBS (4.4%) and UOB (4.0%) stand out and are potential cushions
for investors.