Can Singapore banks achieve 2x P/Bs again? In May 2007, just before
the credit crisis struck, Singapore banks were trading at post-Asian financial
crisis high P/B multiples: DBS at 1.9x, and UOB and OCBC at 2.2x. Their
ROEs in 1H07 worked out to 13.3% for DBS and UOB, and 15.9% for OCBC.
For them to achieve those multiples again, DBS would need to earn an ROE
of 12.8% (our 2011 forecast is 10.2%), UOB 13.2% (2011E 12.9%) and
OCBC 12.2% (2011E 11.0%) as per the Gordon growth model. So, even in
2011, which is expected to be a “normalised” year again, banks may not
reach their recent peak P/Bs. DBS currently trades at 1.15x 2009E, and
UOB/OCBC at 1.54x 2009E.
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Are 2011 forecasts conservative? Singapore banks are enjoying some of
the strongest consensus earnings upgrades of Asian banks. However, 2011
profits are still projected to be just 1.5% ahead of 1H07 (annualised). GDP
has been revised up and the asset quality cycle seems milder than feared.
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What about a 2011 bull case? Using more generous assumptions, we find
bull-case ROEs in 2011 could be roughly 1.5% higher than the base-case
forecasts. In that case, DBS would still fall short of the 12.8% needed to
reach 1.9x P/B, while UOB and OCBC would be comfortably ahead.
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UOB top pick; DBS should perform well when rates start rising: UOB is
the highest ROE bank in Singapore and we believe it has built a sustainable
200-300 bp ROE lead over peers. While we have used 2011 base-case
ROEs for the target prices of DBS and OCBC, in UOB we have used a lower
figure = potential upside.