Banks: Provisions hiked to factor in rising NPLs

Slower Singapore economic growth. Given the 0.5% Singapore GDP YoY contraction for 3Q08 (as per the flash numbers released by the Singapore
Ministry of Trade & Industry), expectations are for further economic weakness
going ahead. The Singapore government has also lowered its 2008 GDP
forecast to 3%.
We have lowered our earnings forecasts for the banks:
• 2008 loan expansion forecast in the low teens is expected to be followed by
low single-digit in 2009.
• Fee & commission income is seen to weak as capital market activities slow
down and sales of wealth management products soften.
• Loan loss provisions is seen to increase more significantly in 2009 as some
asset quality deterioration take place.
Further risk of earnings deterioration could arise from provisions coming
even higher than our revised levels. Our sensitivity analysis shows that an
increase of provisions amounting to 10 bps of average interest earning assets
could lead to a further 7.4% fall in DBS 2009 net profit, 5.6% for OCBC and
5.7% for UOB. The higher sensitivity for DBS makes it relatively less attractive
when compared against its two peers.
Our banks’ price targets have also been cut. We now value the banks by
applying a premium over the 2003 low P/B levels. The recent concerns on the
global credit situation has made the market much more focused on the
economic slowdown going ahead into 2009. Hence, the Singapore banks are
more likely to trade at P/B levels closer to the 2003 levels.
Amongst the banks, we continue to favour OCBC. OCBC has been less
aggressive in loan expansion over the past 3.5 years (Dec 04 till Jun 08) than
DBS, and this should lead to a lower rise in NPL ratio going ahead. In addition,
it has a strong capital position, given its recent raising of Tier 1 capital over the
past 3-4 months. OCBC remains a BUY with a target price of S$7.80, based on
1.5x of 2009 book.
We also recommend BUY on UOB (target price of S$18.40, pegged to 1.5x of
2009 book). UOB has also been more conservative in lending over the past few
years, and this should help to protect its balance sheet strength going ahead. In
addition, UOB has historically kept its expense-income ratio relatively low and
this will help to support earnings in such periods of economic weakness. Lastly,
the S$1.32b of capital raised in Sep 08 has strengthened its balance sheet
robustness.

Stock Recommendations
DBS Group Holdings
S$14.86 NEUTRAL (TP: S$15.50)

OCBC
S$6.42 BUY (TP: S$7.80)

UOB
S$15.70 BUY (TP: S$18.40)

analysis by DMG

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned