Banks
Darkest just before dawn
We reiterate our positive view on the Singapore banks as we believe the recent
sell-off might have overshot fundamentals. Asset quality remains the key
investor concern and our analysis of historical data suggests the deterioration is
likely to be manageable. DBS and UOB are our key Buys.
Key valuation assumptions
Current Target Up/ FY10F
Name Rating price (S$) price (S$) downside PE (x) EPS growth P/BVPS ROE Yield
DBS Buy 8.20 11.00 34.1% 10.2 14.8% 0.7 7.5% 5.9%
OCBC Hold 4.92 5.00 1.6% 9.9 7.7% 0.8 8% 5.8%
UOB Buy 11.76 14.00 19.0% 9.7 1.7% 0.9 9.9% 5.3%
Prices as of 15 January 2009
Source: ABN AMRO forecasts
Sell-off might have overshot fundamentals
Following their relative outperformance for most of 2008, the sell-off in the Singapore banks
over the past three months (-27%, the third-worst in the region) might have overshot on the
downside. Singapore’s macro picture has darkened (RBS forecasts 1.1% GDP contraction
for 2009, still better than the 1.4% contraction in 1997 and the 2.4% contraction in 2001).
Historically, the Singapore banks have been able to manoeuvre through past recessions in
relatively good shape (average earnings contracted 21.1% during the 2001 recession against
a 16.1% contraction for 2009F). Multi-year valuation lows (0.8x 2010F average P/BVPS)
suggest to us that book values are unlikely to decay.
Asset quality remains the key
The key investor concern for 2009 is potential asset quality deterioration. We forecast 2009
peak bad debt charges of 70bp and three-year cumulative bad debt charges of 157bp, which
compare well with the c60bp peak and 165bp cumulative average registered in the previous
downturn in 2001. Singapore banks have entered the current downturn with coverage ratios
above 100%, the highest in a decade. In addition, observable data suggests that Singapore
corporates have entered the downturn in relatively good financial shape (we estimate lower
gearing ratios and higher interest coverage compared with the previous downturn). Despite
two quarters of negative growth, the trend in late-payment behaviour by small and mediumsized
enterprises (SMEs) and bankruptcy filings has remained relatively stable.
Stock specifics
Our top pick remains DBS (Buy, TP: S$11) for its compelling valuation story (0.7x 2010F
P/BV, a multi-year low). We think the rights issue removes both a material investor concern
on capital and a valuation overhang. We like UOB (Buy, TP: S$14) for its strong track record
and sound management, but at 0.9x 2010F P/BVPS it is the most expensive of the three
banks. We retain a Hold on OCBC (TP: S$5 and 0.8x 2010F P/BVPS) in view of concerns
about bad earnings progression in 2009 and uncertainty on the life insurance operations.

Contents
Oversold 3
Singapore banks’ relative outperformance in 2008 has turned into a relative
underperformance with the worsening of the economic outlook. The shares are
testing historical lows, and we believe the sell-off has run ahead of itself.
3
Significant sell-off in the Singapore banks 3
Relative outperformance has turned into relative underperformance… 3
…with the worsening of Singapore’s economic outlook 4
Testing historical lows 4
We expect an earnings slowdown but no collapse 5
Valuations compare well regionally as well 6
Running ahead on asset quality 8
The key investor concern for 2009 is asset quality deterioration. Although not yet
visible, the market expects a turn in the credit cycle. However, comparisons with
historical data suggest that the market might be overpricing the severity of assetquality
deterioration.
8
Focus on the 2001 recession 8
Rise in bad debt charges looks manageable 9
Non-performing loan trend to reverse course, in our view 10
Entering the downturn with a strong capital buffer 11
Observable data supports deterioration, not a collapse 12
Relatively large property exposure, but some comfort 14
Dashboards 17
Company profiles 23
DBS Group Holdings 24
OCBC 30
United Overseas Bank 36