Singapore Banks - UOB Kay Hian 2017-03-23: Long/Short Ideas: BUY OCBC, SELL DBS

Singapore Banks - UOB Kay Hian 2017-03-23: Long/Short Ideas: BUY OCBC, SELL DBS Singapore Banks Market Strategy DBS GROUP HOLDINGS LTD D05.SI OVERSEA-CHINESE BANKING CORP O39.SI UNITED OVERSEAS BANK LTD U11.SI

Singapore Banks - Long/Short Ideas: BUY OCBC, SELL DBS

  • We propose BUY OCBC/SELL DBS as a long/short idea. 
  • OCBC trades on a par to peers (long-term mean: premium of 10%) against 1.4% discount for DBS (longterm mean: discount of 15%). OCBC could outperform DBS by 16.2% over 8-9 months. 
  • This is an alternative view based entirely on relative valuations without regard to fundamentals of each bank. 
  • Maintain OVERWEIGHT.



WHAT’S NEW

  • We offer alternative views based on P/B valuations and assuming fundamentals of the banks, individually or on a relative basis, stay unchanged over time.

Scanning for convergence/divergence. 

  • We plot each bank's P/B vs peers’ P/B. If the ratio is above 1.0x, the bank is trading at a premium to sector average. If the ratio is below 1.0x, the bank is trading at a discount.

DBS Group Holdings (DBS). 

  • DBS typically trades at an average discount of 15% against OCBC and UOB over the past 15 years. It currently trades at a 1.4% discount to peers.
  • DBS has been re-rated since 2012. While CEO Piyush Gupta took over the helm in Nov 09 and implemented his nine strategic priorities, it was only since 2012 that the market recognised progress at DBS.
  • DBS’ relative valuation peaked at 1.4x P/B (premium: 6%) on 21 Jul 15. Subsequently, its share price corrected 25.9% (OCBC: -9.4%, UOB: -15.2%) and reverted to 0.97x P/B (discount: 13%) on 19 Apr 16.

Oversea-Chinese Banking Corp (OCBC). 

  • OCBC typically trades at an average premium of 10% against DBS and UOB. It currently trade on a par to peers.
  • OCBC’s relative valuation troughed at 1.33x P/B (discount of 2%) on 21 Jul 15.
  • Subsequently, its share price corrected 11.6% (DBS: -27.4%, UOB: -19.3%) and reverted to 1.14x P/B (premium: 12%) on 22 Mar 16.
  • United Overseas Bank (UOB). UOB typically trades at an average premium of 7% against DBS and OCBC.
  • UOB outperformed massively during the global financial crisis when Lehman Brothers collapsed and it traded at a peak premium of 60% to peers. Thus, UOB is a classic defensive shelter.
  • UOB currently trades at a 1.4% premium to peers.


ACTION 


Long/Short Ideas: BUY OCBC, SELL DBS. 


  • Judging from movements in relative valuations, we propose BUY OCBC/SELL DBS as a long/short idea.
  • OCBC’s share price could outperform DBS by 16.2% over 8-9 months should the correction during 2H15 and 1Q16 occurs again. This could happen if the Trump administration fails to enact the much anticipated fiscal policies or the FBI’s investigation into Russian interference during the last presidential election unexpectedly uncovers evidence that is damaging to Trump’s presidency.

Maintain OVERWEIGHT. 

  • From the fundamental perspective, banks will benefit from rising interest rates. 
  • DBS and OCBC trade at 2017F P/B of 1.03x and 1.04x, which are 23% and 37% below long-term mean of 1.34x and 1.66x respectively. They also provide decent dividend yields of 3.2% and 3.8% respectively.


SECTOR CATALYSTS 

  • Rising interest rates and bond yields.
  • Easing pressure on asset quality from the O&G sector.
  • Decent 2017F dividend yields of 3.2% for DBS and 3.8% for OCBC.


ASSUMPTION CHANGES 

  • As mentioned above.


RISKS 

  • Rapid increase in the Fed funds target rate (steep rate hikes) that may trigger capital outflows from countries in Southeast Asia.



Singapore Banks Peer Comparison - UOB Kay Hian 2017-03-23



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 21.500 Same 21.500
BUY Maintain BUY 10.750 Same 10.750
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000



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