The Bank Picture - Phillip Securities 2015-09-04: Compelling value, but waiting for a catalyst.

OVERSEA-CHINESE BANKING CORP O39.SI  UNITED OVERSEAS BANK LTD U11.SI  DBS GROUP HOLDINGS LTD D05.SI 

Waiting for a catalyst 


 July loan growth was 2.2% y/y, a better-than-expected figure. 

  • Private home sales took a surprising jump as a single large, attractively-priced development went on the market. With Singapore’s economy at close to no growth, it’s hard to envision a catalyst to improve prospects for banks. 
  • Banks are not as vulnerable to their China exposure as the market seemed to think on 11 August, when shares fell 6% in a day. Our analysis shows that the impact of the 3% fall is probably less than 1% of profits. 


 Rising interest rates are a greater concern, but it cuts both ways. 

  • Net interest margins are positively impacted. However NPLs may rise as well – Q2 data suggests they’re already in an upward creep. There’s additionally a question of mark-to-market valuation with investments: DBS is most vulnerable in this regard. 

 Valuations are attractive. 

  • As seen in the chart below, price-to book multiples for OCBC and UOB are at their lowest levels since the global financial crisis. Dividend yields for the three banks are 3.4-4.4%, modest but not stingy. 
  • We offer the following recommendations for the banks, based on our earnings and balance sheet estimates and a return to normal valuations – thus assuming a time horizon of at least 12 months.
  • Given current market bearishness, we would recommend slow accumulation of a position. Our top pick is OCBC given its superior fundamentals. OCBC is also makes an excellent proxy for the STI overall – 0.84 correlation, 0.92 beta. If you want to play Singapore you can do it with just this one stock.

Phillip Research Team | http://www.poems.com.sg/ Phillip Capital 2015-09-01
Accumulate Maintain Accumulate 22.38 Same 22.38
BUY Maintain BUY 14.87 Same 14.87
BUY Maintain BUY 33.32 Same 33.32


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