Singapore banks have doubled from March lows and are trading close
to long-term average valuation multiples. From here on, performance
would need the support of EPS upgrades which have already started.
In this report, we analyse the potential sources of earnings surprises.
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Asset quality is the most important earnings driver by far and we
estimate a sensitivity of 5-7% for every 10 bp change in credit cost.
2009E earnings surprise could be as much as +10% in UOB (our base
case credit cost is 140 bp, a bit too aggressive) and DBS (Hong Kong-
China SMEs may not turn out to be as bad as feared, but our loan loss
assumption of 120 bp reflects this to some extent).
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Net interest margin is the second biggest earnings driver, each 5 bp
improvement adding 4-6% to profits. Unlike rest of Asia, NIMs in
UOB/OCBC have already widened in the past two quarters. Not much
potential for surprise except in case of DBS, which should benefit in
Hong Kong (one quarter of assets) from Prime-HIBOR improvement.
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Loan growth is not a significant driver and potential for surprise is low.
Profits are fairly sensitive to fee income, especially market related,
which could benefit DBS more. Treasury might continue to be volatile.
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As for book values, UOB and OCBC could enjoy a reversal of onequarter
to one-third of the mark-to-market losses thanks to equity rally,
while losses on government bonds would likely be offset by gains on
corporate bonds. DBS barely breaks even in our estimate.
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Net net, UOB offers highest potential upside to earnings as well as
book value and remains our top pick, followed by DBS and OCBC.