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Singapore Banks Summary

Core Content

This document provides an analysis of the Singapore banks sector, focusing on UOB, DBS, and OCBC, with an emphasis on their performance, valuation, and investment outlook as of June 6, 2014. The report highlights that UOB outperformed its peers despite weaker first-quarter results, and suggests that the sector's performance is likely to continue with UOB and DBS as top picks.

Main Points

• UOB Outperformance: UOB's share price outperformed DBS and OCBC, even after posting the weakest 1Q14 results. This is attributed to reduced appetite for OCBC due to its aggressive strategy and the acquisition of Wing Hang Bank, as well as UOB's smaller exposure to the Greater China market.
• Valuation: UOB's relative P/BV valuation to DBS and OCBC remains modest compared to historical levels. DBS's fair P/E multiple was reduced to 13x from 14x, reflecting its dependence on Greater China and associated risks.
• Investment Recommendations: The analyst maintains an Overweight rating on the banks sector. DBS is the top pick due to its better positioning for a rising interest rate environment, followed by UOB. OCBC is advised to be cautious due to execution risks and a more volatile earnings profile.
• Target Prices and Upside: Revised target prices for the banks are:
  • DBS: SGD20.70 (upside 21.2%)
  • UOB: SGD25.70 (upside 13.0%)
  • OCBC: SGD9.63 (upside -1.3%)
• Risk and Catalysts:
  • UOB: Risk includes potential interest rate increases; Catalyst is a sharp rise in interest rates.
  • DBS: Risks include unexpected personnel changes; Catalysts include consistent earnings and interest rate increases.
  • OCBC: Risks include failure to extract synergies from the Wing Hang Bank acquisition and prolonged capital market depression; Catalysts include a strong capital market and interest rate increases.

Key Information

• Share Prices (as of June 6, 2014):

  • DBS: SGD17.08
  • UOB: SGD22.74
  • OCBC: SGD9.76

• Valuation Metrics:

  • P/E (x):
    • DBS: FY14E 11.8, FY15E 9.8
    • UOB: FY14E 12.2, FY15E 10.9
    • OCBC: FY14E 10.8, FY15E 9.7
  • P/BV (x):
    • DBS: FY14E 1.2, FY15E 1.1
    • UOB: FY14E 1.4, FY15E 1.3
    • OCBC: FY14E 1.3, FY15E 1.2
  • ROAE (%):
    • DBS: FY14E 10.4, FY15E 11.5
    • UOB: FY14E 11.7, FY15E 12.2
    • OCBC: FY14E 12.6, FY15E 13.0
  • Dividend Yield (%):
    • DBS: FY14E 3.4, FY15E 3.5
    • UOB: FY14E 2.9, FY15E 2.9
    • OCBC: FY14E 3.5, FY15E 3.5

Tables

Peer Comparison Table

Valuation Summary Table

Conclusion

The report maintains an Overweight rating for the Singapore banks sector, with DBS as the top pick and UOB as the second. OCBC is advised to remain cautious. UOB's outperformance is expected to continue due to its relatively modest valuation and lower exposure to Greater China, despite its weaker first-quarter results. The analysis suggests that interest rate increases are a key catalyst for the sector, particularly for DBS and UOB.