Singapore Banks Sector

Transcription

1 Asia Pacific/Singapore Equity Research Banks / MARKET WEIGHT Research Analysts Sanjay Jain sanjay.jain@credit-suisse.com Anand Swaminathan anand.swaminathan@credit-suisse.com Singapore Banks Sector SECTOR REVIEW Better loan growth to drive FY11E earnings momentum; UOB new sector top pick Figure 1: Gross loan growth Singapore versus overseas (211E YoY%) Singapore 14. Overseas Source: Credit Suisse estimates Revising up loan growth assumption, not only for Singapore but more for overseas Singapore government has raised its 211 GDP growth estimate to -7% from 4-6% previously. Combined with higher inflation, loan growth across Asia has been surprising on the upside, and we revise up our 211 loan growth assumption for UOB to 18% (from 16%), DBS 14% (13%) and OCBC 1% (13%). The 1Q11 QoQ loan growth in Singapore vs overseas was 4.3%/2.7% in DBS, 6.1%/7.9% in UOB and 2.7%/6.1% in OCBC. which has fee and margin implications: By itself the earnings sensitivity of loan growth is not huge. But stronger loan growth means better fee income (especially loan-related fee) and equally importantly, faster overseas growth brings with it wider margins (expected to bottom in 2Q11). Our discussions with banks confirm this hypothesis and it was already visible in 1Q11 results, with grew ex Singapore loans growing aggressively. Consensus earnings should be upgraded in 2H; Upgrade UOB to OUTPERFORM; our new sector top pick: Our DBS/OCBC E EPS is revised up by 1-3% and UOB by -7% driven by higher loan growth, fee income and some NIM improvement in 2H11). We upgrade UOB to OUTPERFORM (from Neutral) with a target price of S$2. (from S$22.) based on Gordon Growth derived P/B of 1.8x and P/E of 14x using sustainable ROEs of 13% (conservative given we forecast ROEs to average 13.7% in E). UOB is our new sector top pick 1) best loan growth momentum among peers, 2) greater scope for NIM recovery in 2H11 given overseas mix, 3) attractive valuations relative to ROEs (Projected E ROE DBS 11.2%, UOB 13.7%, OCBC 12.8%). Catalyst would be 2Q11 results in July, the key risk being UOB s European bank securities portfolio. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Focus table and charts Figure 2: Singapore banks geographical loan growth trend and projections (% growth) (March 211) S$ mn % share 1Q1 2Q1 3Q1 4Q1 1Q11 2Q-4Q11E FY1 FY11E DBS Singapore 77, HK 36, Rest of greater China 14, South and South East Asia 1, Total 16, UOB Singapore 8, Malaysia 16, Thailand 7, Indonesia 4, Greater China 6, Total 122, OCBC Singapore 61, Malaysia 17, Other ASEAN 7, Greater China 12, Total 11, Figure 3: Loan growth: SG versus overseas 1Q11 QoQ (%) Figure 4: Loan growth: SG versus overseas 2Q-4Q11E (%) Singapore Overseas Singapore 11. Overseas DBS U OB OCBC Figure : NIM in key markets of Singapore banks (21 %) SG HK MY ID TH Figure 6: Loan growth versus fee income (YoY%) Gross loans YoY Fee income YoY 1Q 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Figure 7: Core EPS growth YoY (%) Figure 8: Core ROE (%) '9 '1 '11E '12E '1 1Q11 '11E '12E Source: Credit Suisse estimates Singapore Banks Sector 2

3 Better loan growth to drive FY11E earnings momentum Better loan growth expectation The Singapore government has raised its GDP growth estimate to -7% (from 4-6%). Combined with the fact that loan growth across most of Asia has been surprising on the upside, we revise up our 211 loan growth assumption for Singapore banks to 18% for UOB (from 16%), 14% for DBS (from 12%) and 1% for OCBC (from 12%). UOB is set to show the best loan growth in FY11E with a significant lead over DBS and OCBC already in 1Q11. For the rest of FY11E, banks expect overseas loan growth to be the main driver: Singapore (all three banks) corporate loan demand remains robust, even as housing loan growth appears to be peaking. System loan growth could slowdown from 1Q11 runrate, with overall system loan growth in the mid teens for FY11. Greater China (all three banks) loan demand from Chinese corporates looking for USD funding in Hong Kong remains strong. Banks are swapping their excess SGD/USD funding in Singapore to fund their loans booked in Hong Kong. Malaysia/Indonesia (UOB/OCBC) loan demand remains robust. Pricing pressure is a near-term issue, but policy rate hike should help improve margins in 2H11. Thailand (UOB) system loan growth continues to be healthy. After underperforming for many years, UOB expects Thailand loan growth to gain momentum starting 2H11. Better loan growth = better margins and fee income Better-than-expected loan growth could have a positive impact on margins (driven by higher margin overseas loan growth) and fee income as well. Margins DBS expects margins to bottom around levels seen in 1Q11 (with no improvement expected until SIBOR/HIBOR start going up next year). UOB/OCBC expect some margin pressure near term with potential for improvement in 2H11 (as policy rate hikes in overseas markets offset loan pricing pressure). We see better scope for 2H11 margin improvement in UOB given the relatively faster overseas loan growth. Fee income Should continue to be healthy for all three banks, especially loan-related fees as banks look to offset lower spreads with higher fees Operating expenses Banks expect cost income ratio to hover around cyclically high 4% levels near term given wage inflation and further investments in regional network. Asset quality Not a concern at least in the next 12 months. Upgrade UOB to OUTPERFORM our new top pick We increase DBS/OCBC E EPS by 1-3% (driven by higher loan growth) and UOB E EPS by -7% (driven by higher loan growth, slightly better NIM in 2H11). We also upgrade UOB to OUTPERFORM (from Neutral) with a new target price of S$2. (from S$22.) based on Gordon Growth derived applicable P/B of 1.8x and P/E of 14x using sustainable ROEs of 13% (conservative in our view given we expect ROEs to average 13.7% in E), cost of equity 9.3% and growth rate of %. UOB is our new sector top pick 1) best loan growth momentum, 2) greater scope for NIM recovery in 2H11 given overseas loan growth (UOB 7.9% QoQ in 1Q11 versus DBS 2.7%, UOB 6.1%), and 3) valuations are attractive still trades at a discount to OCBC despite a superior ROE profile (Average E ROE DBS 11.2%, UOB 13.7%, OCBC 12.8%). In terms of European bank securities portfolio, UOB does not have exposure to peripheral Europe and in fact, has been able to gradually exit some of its holdings. Singapore loan growth continued to exceed expectations, and overseas should be even stronger Overseas loan growth should result in wider margins for UOB/OCBC in 2H11 given their mix of Indonesia and Malaysia UOB should deliver doubledigit PPOP growth; trades at a discount despite superior ROE profile Singapore Banks Sector 3

4 Valuation comparison Figure 9: Singapore banks rating summary 2-May-211 Rating NEUTRAL OUTPERFORM OUTPERFORM Price (S$) Target (S$) Upside (%) E 12E 1 11E 12E 1 11E 12E P/E (x) EPS growth (%) P/B (x) ROE (%) Figure 1: Singapore banks valuation comparison 2-May E 212E E 212E Cash core profit (S$ mn) Cash core profit growth (%) DBS 2,471 2,36 2,34 2,62 3, 3,328 DBS UOB 2,81 1,889 1,86 2,368 2,696 3,92 UOB OCBC 1,88 1,493 1,744 2,218 2,431 2,861 OCBC Reported FDEPS (S$) Reported FDEPS growth (%) DBS DBS UOB UOB OCBC OCBC Cash core FDEPS (S$) Cash core FDEPS growth (%) DBS DBS UOB UOB OCBC OCBC P/E on reported FDEPS (x) P/E on cash core EPS (x) DBS DBS UOB UOB OCBC OCBC Book value per share (S$) P/B (x) DBS DBS UOB UOB OCBC OCBC Cash core ROA (%) Cash core ROE (%) DBS DBS UOB UOB OCBC OCBC Cash core ROTE (%) P/TB (x) DBS DBS UOB UOB OCBC OCBC Dividend per share (S$) Dividend yield (%) DBS DBS UOB UOB OCBC OCBC Mkt cap / PPOP (x) Market cap/ deposits (%) DBS DBS UOB UOB OCBC OCBC Source for both tables above: Company data, Credit Suisse estimates Singapore Banks Sector 4

5 Operational comparison Figure 11: Singapore banks operational comparison E 212E E 212E Net int. income growth (%) NIM (%) DBS DBS UOB UOB OCBC OCBC Loan yield (%) Cost of deposits (%) DBS DBS UOB UOB OCBC OCBC Loan spread (%) Cost of funding (%) DBS DBS UOB UOB OCBC OCBC Non-int income growth (%) Non int inc./total revenue (%) DBS DBS UOB UOB OCBC OCBC Optg expense growth (%) Cost-income (%) DBS DBS UOB UOB OCBC OCBC PPOP growth (%) PPOP ROE (%) DBS DBS UOB UOB OCBC OCBC Cash core profit growth (%) Cash core ROA (%) DBS DBS UOB UOB OCBC OCBC Loan growth (%) Cash core ROE (%) DBS DBS UOB UOB OCBC OCBC Loan deposit ratio (x) P&L provisioning (bp of loans) DBS DBS UOB UOB OCBC OCBC Loan loss coverage (%) Risk weighted assets growth (%) DBS DBS UOB UOB OCBC OCBC Reported Tier 1 CAR (%) Equity Tier 1 CAR (%) DBS DBS UOB UOB OCBC OCBC Singapore Banks Sector

6 Better loan growth expectations UOB on track to show best loan growth in FY11E With Singapore s economic growth continuing to surprise on the upside and all three banks aggressive on overseas markets (ASEAN and Greater China), we believe the low to mid-teens loan growth for FY11E guided by Singapore banks might be conservative. With a significantly better loan growth performance already in 1Q11, UOB is set to show the best loan growth among peers in FY11E. DBS and OCBC management expect FY11E loan growth to be in the range of low-to-midteens growth. We upgrade their loan growth estimates slightly for FY11 (DBS from 13% to 14%, OCBC from 13% to 1%). UOB management is confident of showing mid-teens loan growth in FY11E, which sounds conservative given the 6.7% QoQ loan growth in 1Q11. We upgrade UOB s loan growth estimates for FY11 from 16% to18%. Our higher group level loan growth expectations for Singapore banks is driven by better loan growth expectations in both Singapore and overseas markets. Our geographical loan growth expectations for the rest of FY11E is shown in the table below. Figure 12: Singapore banks geographical loan growth trend and projections QoQ % % growth YoY% (March 211) S$ mn % share 1Q1 2Q1 3Q1 4Q1 1Q11 2Q-4Q11E FY1 FY11E Banking system loans DBS Singapore (DBU + ACU) Hong Kong Malaysia Indonesia Thailand Singapore 77, HK 36, Rest of greater China 14, South and South East Asia 1, Rest of the world 16, Total 16, UOB Singapore 8, Malaysia 16, Thailand 7, Indonesia 4, Greater China 6, Other 8, Total 122, OCBC Singapore 61, Malaysia 17, Indonesia 7, Greater China 12, Other Asia Pacific, Rest of the world 6, Total 11, Singapore Banks Sector 6

7 Loan to remain strong across the region Singapore GDP and loan growth continue to positively surprise Singapore banking system loan growth 6.4% QoQ in 1Q11 was the best quarterly loan growth since 1Q8. While housing loans growth appears to have peaked near term, corporate loan growth continues to be strong (banks continue to see strong loan demand for working capital as well as new capex). Although it might be difficult to maintain strong runrate of 1Q11, we expect overall system loan growth to be in the mid-teens, with all three local banks looking to maintain loan market share. Figure 13: Singapore: Nominal GDP growth vs banking system loan growth (YoY %) 3 SG nom GDP YoY SG loans YoY Q87 1Q89 1Q91 1Q93 1Q9 1Q97 1Q99 1Q1 1Q3 1Q 1Q7 1Q9 1Q11 Figure 14: Singapore: Banking system loan growth (segment-wise) (YoY%) (Domestic banking unit) Q2 1Q3 1Q4 1Q 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Business Personal Housing Source: CEIC, Credit Suisse estimates Hong Kong focus on loan demand from Chinese corporates Source: CEIC, Credit Suisse estimates Hong Kong loan growth is now back to decade highs. All three Singapore banks appear keen to fund blue-chip Chinese companies looking for US$ funding in Hong Kong (typically trade finance related relatively safer but low margin loans). Figure 1: Hong Kong: Nominal GDP growth vs banking system loan growth (YoY %) 4 Figure 16: Hong Kong: Banking system loan growth (segment-wise) (YoY%) 3 3 HK nom GDP YoY HK loans YoY Q87 1Q89 1Q91 1Q93 1Q9 1Q97 1Q99 1Q1 1Q3 1Q 1Q7 1Q9 1Q11 Source: CEIC, Credit Suisse estimates -1 1Q2 1Q3 1Q4 1Q 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Business Personal Housing Source: CEIC, Credit Suisse estimates Singapore Banks Sector 7

8 Malaysia strongest loan growth since the Asian financial crisis UOB and OCBC are confident of gaining loan market share in Malaysia. Banking system loan growth continues to be healthy (boosted in part by the government s new economic plan) and could be in the mid-teens range for FY11E. Figure 17: Malaysia: Nominal GDP growth vs banking system loan growth (YoY %) 2 MY nom GDP YoY MY loans YoY Q99 1Q1 1Q3 1Q 1Q7 1Q9 1Q11 Figure 18: Malaysia: Banking system loan growth (segment-wise) (YoY%) Q2 1Q3 1Q4 1Q 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Business Personal Housing Source: CEIC, Credit Suisse estimates Indonesia expect loan growth to be in the high teens Source: CEIC, Credit Suisse estimates Indonesia continues to maintain healthy broad-based loan growth. Both UOB and OCBC have now stabilised their Indonesian operations comfortable with the size of branch network and consolidation of local subsidiary now complete. Although the overall banking system loan growth for FY11E could end up in the high teens, UOB and OCBC s Indonesia loan growth could potentially exceed that given their low base. Figure 19: Indonesia: Nominal GDP growth vs banking system loan growth (YoY %) 4 ID nom GDP YoY ID loans YoY Figure 2: Indonesia: Banking system loan growth (segment-wise) (YoY%) Business Personal Housing Q9 1Q97 1Q99 1Q1 1Q3 1Q 1Q7 1Q9 1Q11 Source: CEIC, Credit Suisse estimates 1Q3 1Q4 1Q 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Source: CEIC, Credit Suisse estimates Singapore Banks Sector 8

9 Thailand system loan growth healthy; UOB gaining confidence in Thailand after underperforming for many years Figure 21: Thailand: Nominal GDP growth vs banking system loan growth (YoY %) 2 TH nom GDP YoY TH loans YoY Figure 22: Thailand: Banking system loan growth (segment-wise) (YoY%) Q9 1Q97 1Q99 1Q1 1Q3 1Q 1Q7 1Q9 1Q11-1 1Q 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Business Personal Housing Source: CEIC, Credit Suisse estimates Source: CEIC, Credit Suisse estimates UOB loan growth best for two quarters in a row UOB showed the best QoQ loan growth (UOB 6.7% QoQ versus DBS 3.% QoQ and OCBC 4.2% QoQ) continuing on its strong performance in 3Q-4Q1 and the only bank to gain loan market share in Singapore and core regional markets (except Thailand). UOB the only bank to gain market share in Singapore, Malaysia and Indonesia After strong performance in 9M1, DBS has now lost Singapore loan market share for two quarters in a row. UOB has now gain Singapore market share three quarters in a row. Figure 23: Banks geographical loan growth vis-à-vis respective banking system loan growth YoY % QoQ % YoY/QoQ % Q11 1Q1 2Q1 3Q1 4Q1 1Q11 SG DBU+ACU loans DBS SG geography UOB SG geography OCBC SG geography DBS S$ loans UOB S$ loans OCBC S$ loans HK system loans DBS HK$ loans MAL system loans UOB Mal. loans OCBC Mal. loans Thai system loans UOB Thai loans Indo system loans UOB Indo. loans OCBC Indo. loans DBS group loans UOB group loans OCBC group loans Singapore Banks Sector 9

10 Figure 24: Singapore banks group loan growth (%) Q11 2Q-4Q11E 211E 23. UOB loan growth momentum expected to continue near term Geographical loans Singapore continues to be the main driver; Greater China loan growth strong for all thee banks DBS mainly driven by Singapore, Greater China (ex- Hong Kong) and India (local assets grew 34% QoQ). Lost loan market share in both Singapore and Hong Kong. UOB broad based growth with market share gains in Singapore, Malaysia and Indonesia OCBC strong Greater China loan growth (bills receivables related to trade finance less risky but lower margin loans), but lost loan market share in Singapore Figure 2: Banks loan books geographical breakdown and growth March 211 (S$ bn) Composition (%) March 211 QoQ (%) March 211 YoY (%) Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans Currency strong USD loan growth across all banks Figure 26: Banks loan books currency-wise breakdown and growth March 211 (S$ bn) Composition (%) March 211 QoQ (%) March 211 YoY (%) SGD USD MYR HKD THB Others Total Singapore Banks Sector 1

11 Industry-wise corporate loans main driver of QoQ growth Figure 27: Banks loan books industry-wise breakdown and growth March 211 (S$ bn) Composition (%) March 211 QoQ (%) March 211 YoY (%) Consu. + housing Personal loans Housing loans Business loans Manufacturing Bldg/constn Gen commerce Trans/commn Fin l institutions Others Total loans DBS corporate loan growth led by construction and commerce related loans, housing loan growth continued to lag peers (lost mortgage loan market share in Singapore). UOB broad-based corporate loan growth (led by building/construction loans), best housing loans growth (4.8% QoQ) among peers. Manufacturing loans, which carry biggest impairment among business loans, actually shrunk during the quarter. OCBC corporate loan growth led by commerce related loans, best personal loans growth (4.9% QoQ) among peers, manufacturing shrunk. Singapore Banks Sector 11

12 Better loan growth = better margins and fee income 2H11 could see margin improvement in UOB/OCBC driven by overseas loan growth Figure 28: Sector NIMs in Singapore banks key markets (%) Ex-Singapore loan growth typically improves group margins SG HK MY ID TH Source: Credit Suisse estimates DBS management has signalled that margins might have bottomed near term, but any margin improvement might have to wait till next year when both SIBOR and HIBOR are expected to inch up (DBS will be the biggest beneficiary of a higher SIBOR in Singapore) UOB expects margin pressure to continue near term, but could improve in 2H11 as overseas loans (higher margin) growth outperforms Singapore and as policy rate hikes convert to better NIMs in regional markets OCBC similar to UOB management expects margin pressure to continue near term, but could improve in 2H11 as overseas loan growth remains strong and as policy rate hikes convert to better NIMs in regional markets. But some margin headwinds remain from lower margin loans from Bank of Singapore and trade finance bills in Greater China. Figure 29: Singapore banks net interest margin (%) Q11 211E 212E Singapore Banks Sector 12

13 DBS and UOB margins more resilient in 1Q11 Two main reasons for continued overall margin pressure on Singapore banks 1) Singapore loan growth continues to be strong (offsetting margin gains from higher margin overseas growth) and 2) pricing competition continues to be intense across the region which is delaying margin gains from policy rate hikes. Figure 3: Singapore banks Quarterly net interest margin trends (%) 2.6 Banks expect mild margin pressure to continue near term Q3 1Q4 1Q 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 Figure 31: Singapore banks spreads and margins (%) YoY 1Q1 2Q1 3Q1 4Q1 1Q11 QoQ YoY Loan spread DBS UOB OCBC Interbank spread DBS UOB OCBC Securities spread DBS UOB OCBC Overall spread DBS UOB OCBC Overall Group NIM DBS UOB OCBC DBS the only bank to show a slight margin improvement of +1 bp QoQ (thanks to better securities and interbank spread) in 1Q11. UOB margins declined slightly by 1 bp QoQ as better interbank spreads mostly offset lower loan and securities spreads Singapore Banks Sector 13

14 OCBC showed the worst QoQ margin performance (-6 bp QoQ) as lower loan and interbank spreads offset better securities spreads Overseas margins were under pressure for past few quarters Singapore margins appear to be stabilising with bottoming of corporate spreads and some let up mortgage loan competition Rest of ASEAN pricing competition continues to pressure margins. Policy rate hikes should start supporting margins by 2H11 Hong Kong DBS HK margins continued to remain under pressure as tighter liquidity continued to offset any gains from the recent improvement in pricing power Figure 32: Singapore banks regional net interest margins as disclosed by the banks (%) YoY 1Q1 2Q1 3Q1 4Q1 1Q11 QoQ YoY UOB Singapore n.a. n.a. n.a. DBS HK UOB Malaysia n.a. n.a. n.a. OCBC Malaysia UOB Indonesia n.a. n.a. n.a. OCBC Indonesia UOB Thailand n.a. n.a. n.a. Note: UOB did not disclose 1Q11 geographical margins Fee income growth to remain healthy driven by better loan growth and market liquidity Figure 33: Singapore banks loan growth versus fee income growth (YoY%) (quarterly) 4 3 Gross loans YoY Fee income YoY Q 3Q 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 Source: Credit Suisse estimates (Aggregated for all three banks) Expect fee income growth to remain strong in FY11E Strong loan growth and healthy market liquidity conditions should continue to support fee income growth. All three banks are focussed on improving their wealth management related fee income by expanding their privileged (mass affluent) and private (high net worth) banking offerings. Especially, OCBC should gain from strong growth in Bank of Singapore AuMs (up 28% YoY to US$28 bn as of March 211). Overall, we expect low-tomid teens fee income growth for Singapore banks in FY11. Singapore Banks Sector 14

15 Figure 34: Fee income (S$ mn) Figure 3: Fee income growth (YoY %) 2, 1,8 1,6 1,4 1,2 1, 1,721 1,6 1,394 1, E 212E 1,483 1,348 1,268 1,162 1, E 212E Q11 fee income growth was healthy, although driven by some one-offs DBS mainly driven by episodic gains in investment banking and loan-related fee income. Wealth management fee income growth remains strong as well, but stock broking and fund management fees were down QoQ UOB mainly driven by strong loan-related fee income, but investment banking and fund management fees were weaker QoQ OCBC mainly driven by strong investment banking and wealth management fee income, but stock broking, fund management and loan related fees were weaker QoQ Figure 36: Singapore banks fee income comparison (S$ mn) 21 YoY% 1Q11 QoQ% YoY% 21 YoY% 1Q11 QoQ% YoY% 21 YoY% 1Q11 QoQ% YoY% Capital mkt-related Stock broking n.a. n.a. n.a. n.a. n.a Investment banking Wealth mgmt n.a. n.a. n.a. n.a. n.a Fund mgmt Other fee income Loan-related Trade/remittances Deposit-related Credit cards Other Total fee income 1, , Singapore Banks Sector 1

16 Trading income difficult to beat the high base set in 21 Trading income could continue to be volatile and difficult to estimate, but it would be difficult to beat the high base set in 21 (especially DBS). Looking at just the 1Q11 trading income performance, the run-rate was higher than the average run rate in FY1 for both DBS and UOB but we expect normalisation through the rest of the year. Figure 37: Trading income (S$ mn) Q11 211E 212E Figure 38: Investment gains (S$ mn) Q11 211E 212E All three banks continue to show strong trading income performance, especially DBS which continues to see increased client flows and strong performance of RMB-related business in Hong Kong (with a 2% market share in RMB interbank and 1% market share in RMB related client flows). Figure 39: Singapore banks trading income (S$ mn) (quarterly) Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 Singapore Banks Sector 16

17 Operating costs good cost control but pressure from wage inflation Cost pressure to continue through the rest of 211E All three banks expect cost pressure to continue near term (driven by investments and wage inflation), with cost-income ratio hovering around 4% levels near term. Figure 4: Cost-to-income ratio (%) Figure 41: Operating expenses growth YoY (%) Q11 211E 212E E 212E Note: For OCBC ING Asia Private Bank adds to costs in 21 All three banks continue to hire aggressively across the region All three banks continue to be in investment mode in the region. They continued to hire during the quarter, with DBS showing the biggest rise (4.9% QoQ). Figure 42: Cost-to-income ratio (%) Figure 43: Number of employees (% change) '9 YoY '1 YoY 1Q11 QoQ Q1 3Q1 1Q DBS staff costs up 12% QoQ, but overall costs remained flat QoQ driven by better management of other costs UOB good overall cost management (-6% QoQ), staff costs were up just 3% QoQ OCBC good overall cost management (-6% QoQ), staff costs up % QoQ. 4Q1 had a higher base due to one-off consolidation costs in Indonesia Singapore Banks Sector 17

18 Figure 44: Singapore banks operating expenses (S$ mn) YoY% 1Q1 2Q1 3Q1 4Q1 1Q11 QoQ% YoY% Personnel cost DBS 1,26 1,292 1, UOB 1,82 1,116 1, OCBC 1,4 99 1, Depreciation DBS UOB OCBC Other DBS 1,2 1,117 1, UOB OCBC Total DBS 2,61 2,64 2, UOB 2, 2,7 2, OCBC 1,84 1,796 2, Asset quality should continue to normalise Figure 4: Asset quality snapshot Q1 2Q1 3Q1 4Q1 1Q11 NPL growth (YoY/QoQ %) DBS UOB OCBC NPLs (S$ mn) DBS 8,149 4,411 4,12 3,869 3,482 1,763 1,691 1,46 1,168 1,98 3,876 2,878 3,764 3,431 3,171 2,878 2,86 UOB 2,993 2,462,944,61,81,4 3,931 3,162 1,713 2,62 2,26 2,1 2,13 2,7 2,12 2,1 2,2 OCBC 4,33 4,92,183 4,36 3,834 2,71 2,333 1,829 1,34 1,182 1, ,319 1,26 1, NPL ratio (%) DBS UOB OCBC P&L provisions (bp of loans) DBS UOB OCBC NPA coverage (% of loans) DBS UOB OCBC Net NPAs/shareholders funds (%) DBS UOB OCBC Singapore Banks Sector 18

19 Fall in new NPA formation. Figure 46: DBS quarterly new NPL formation Figure 47: OCBC quarterly new NPA formation , Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 New NPAs (S$ mn) as bp of loans (RHS) New NPLs (S$ mn) as bp of loans (RHS) should continue to support low provisioning levels near term All three banks continue to set aside general provisioning to support incremental loan. Figure 48: Credit cost (bp of loans) (SP + GP) Figure 49: Loan loss coverage (%) Q11 211E 212E E 212E Singapore Banks Sector 19

20 Figure : Singapore banks P&L provisioning snapshot (bp of loans) '99 ' '1 '2 '3 '4 ' '6 '7 '8 '9 '1 1Q1 2Q1 3Q1 4Q1 1Q11 Specific provision on loans DBS UOB OCBC SP on securities DBS UOB OCBC General provisions DBS UOB OCBC Total provisions DBS UOB OCBC Capitalisation remains comfortable All three banks Equity Tier 1 ratio remained comfortable. Risk weighted assets growth has caught up with loan growth (after lagging in FY1) as banks increase overseas loan growth. On Basel 3, we estimate 1.-2.% effect on current Equity Tier 1 levels, which should still keep their pro-forma post-basel 3 Equity Tier 1 around 1% levels. OCBC has introduced a change in capital calculation driven by MAS Notice 637 issued in July 21, under which OCBC has now included unrealised gains on equity exposures (with a % haircut) in Tier 2. On the risk weighted assets side, OCBC has now moved from Standardised to Internal Ratings Based (IRB) approach. OCBC explained that this change is part of the eventual move to Basel 3 and does not reduce the post-basel 3 proforma capital ratios. As a result, management has reduced the guidance for Basel 3 impact to 1.% on 12.% core Tier 1 ratio as of March 211 (from the previously guided 2.% impact on 12.% core Tier 1 ratio as of December 21). Figure 1: Tier 1 capitalisation (%) (as of March 211) Figure 2: Loan growth vs RWA growth QoQ (%) (1Q11) Equity Tier 1 Hybrid Tier Loan growth QoQ RWA growth QoQ Singapore Banks Sector 2

21 Upgrade UOB to OUTPERFORM; our new sector top pick Increasing UOB EPS estimates by -7% We upgrade UOB EPS estimates by -7% driven mainly by higher loan growth assumptions, slightly better margin assumptions (due to overseas loan growth driven margin gains in 2H11) and slightly higher non-interest income assumptions. We maintain our 16% loan growth assumption for FY11E (highest among Singapore banks), but note upside risks if Singapore banking system loan growth continues to surprise on the upside and UOB maintains its overseas loan growth momentum. Figure 3: UOB summary of estimate changes New estimates Old estimates % difference (S$ mn) 211E 212E 213E 211E 212E 213E 211E 212E 213E Net interest income 3,876 4,1,21 3,81 4,372 4, Fee income 1,348 1,483 1,631 1,32 1,47 1, Trading income Provisions bp of loans Core net profit 2,696 3,92 3,423 2,63 2,888 3, Core EPS (S$) Net interest margin (%) Loan growth (%) Equity Tier 1 (%) Core ROE (%) Source: Credit Suisse estimates Upgrade UOB to OUTPERFORM; new target price S$2. Our new target price of S$2. for UOB is based on Gordon Growth derived applicable P/B of 1.8x and P/E of 14x using sustainable ROEs of 13% (conservative in our view given we expect ROEs to average 13.7% in E), cost of equity 9.3% and growth rate of %. We upgrade UOB to OUTPERFORM, which is also our new sector top pick. We also maintain our OUTPERFORM rating on OCBC, which is second in our pecking order on a 12-month time frame. We like DBS as a turnaround story and the biggest beneficiary of a higher SIBOR but of which could unravel only next year, making DBS an attractive stock on a month time frame. Our preference for UOB on a 12-month time frame is driven by: (1) UOB s loan growth momentum has been the best among peers in the last two quarters and should be able to show the best loan growth among peers in FY11E with potential for upside surprise (driven by both Singapore and overseas growth) resulting in better net interest margins and fee income growth as well (2) UOB net interest margins have the most potential to surprise on the upside in 2H11, driven by better overseas loan growth as policy rate hikes in the region start supporting margins. UOB s ex-singapore loan growth of 7.9% QoQ is the best among peers (versus DBS 2.7% QoQ and OCBC 6.1% QoQ) (3) UOB is attractive on valuations despite clearly being the best ROE bank in Singapore (average E ROE DBS 11.2%, UOB 13.7%, OCBC 12.8%) and potentially a better earnings growth profile near term, UOB continues to trade at a discount to OCBC Singapore Banks Sector 21

22 One risk in UOB has been its European bank securities holdings. They have fallen further to S$1.6 bn (8% of equity) from S$1.9 bn as of 21. UOB plans to continue to offload its holdings depending on market conditions. Increasing DBS/OCBC E EPS estimates by 1-3% We increase DBS and OCBC EPS estimates by 1-3% driven mainly by higher loan growth assumptions. Figure 4: DBS summary of estimate changes New estimates Old estimates % difference (S$ mn) 211E 212E 213E 211E 212E 213E 211E 212E 213E Net interest income 4,77,394 6,16 4,744,36 6, Fee income 1,6 1,721 1,893 1,6 1,721 1, Trading income Provisions bp of loans Core net profit 3, 3,328 3,981 2,997 3,278 3, Core EPS (S$) Net interest margin (%) Loan growth (%) Equity Tier 1 (%) Core ROE (%) Source: Credit Suisse estimates Figure : OCBC summary of estimate changes New estimates Old estimates % difference (S$ mn) 211E 212E 213E 211E 212E 213E 211E 212E 213E Net interest income 3,37 3,931 4,467 3,273 3,83 4, Fee income 1,13 1,268 1,39 1,13 1,268 1,39... Trading income Provisions bp of loans Core net profit 2,431 2,861 3,272 2,44 2,78 3, Core EPS (S$) Net interest margin (%) Loan growth (%) Equity Tier 1 (%) Core ROE (%) Source: Credit Suisse estimates Figure 6: Singapore banks rating summary 2-May-211 Rating NEUTRAL OUTPERFORM OUTPERFORM Price (S$) Target (S$) Upside (%) E 12E 1 11E 12E 1 11E 12E P/E (x) EPS growth (%) P/B (x) ROE (%) Source: Bloomberg, Credit Suisse estimates Singapore Banks Sector 22

23 Figure 7: Trailing P/B (x) Figure 8: 12-month forward P/E (x) Dec-1 Dec-3 Dec- Dec-7 Dec-9 Source: Credit Suisse estimates Dec-1 Dec-3 Dec- Dec-7 Dec-9 Source: Credit Suisse estimates Figure 9: Trailing P/B OCBC / UOB (x) Dec-1 Dec-3 D ec- D ec-7 Dec-9 Dec-11 OCBC / UO B P/B Y avg Source: Credit Suisse estimates Figure 6: 12M P/E OCBC / UOB (x) Dec-1 Dec-3 D ec- D ec-7 Dec-9 Dec-11 OCBC / UOB 12M P/E Y avg Source: Credit Suisse estimates UOB still has some catching up to do in terms of valuation gap with OCBC Figure 61: UOB trailing P/B (x) vs core ROE (%) 3. UOB trailng P/B UOB ROE 17 UOB s P/B multiple continues to lag its ROE Dec-97 Dec-99 Dec-1 Dec-3 Dec- Dec-7 Dec-9 Dec-11 Singapore Banks Sector 23

24 DBS financials Figure 62: DBS financial snapshot E 212E 213E Year-end 31 Dec. (S$ mn) E 212E 213E YoY% YoY% YoY% YoY% 1Q11 QoQ % YoY% P&L statement Net interest income 4,4 4,318 4,77,394 6, , Non-interest income 1,881 2,33 2,42 2,661 2, Total revenue 6,336 6,63 7,19 8, 9, , Operating expenses -2,64-2,92-3,173-3,368-3, Pre-provision operating profit 3,732 3,728 4,22 4,686, , Loan loss provisions -1, Non-operating income Profit before goodwill, tax 2,36 3,332 3,923 4,373, , Goodwill amortisation -1,18 Taxation Net profit (post-pref. dividend) 2,34 1,62 3, 3,328 3, Cash core profit 2,34 2,62 3, 3,328 3, Balance sheet (S$ bn) Balances with banks Investments Gross loans Provisions Net loans Total assets Customer deposits Borrowings/debt Total liabilities Shareholders' equity Returns and efficiency (%) Cash core ROA Cash core ROE Loan spread Interbank spread Securities spread Net interest margin Non-int. inc./revenue Cost/revenue Operating cost-to-assets Balance sheet (%) Asset/equity (x) Loan-deposit ratio Tier-1 (reported) Core tier 1 ratio Total CAR NPLs to loans B/S loan loss coverage Key assumptions (%) Growth in gross loans Overall interest spread Non-interest inc. growth Operating exp growth P&L prov. (bp of loans) Singapore Banks Sector 24

25 UOB financials Figure 63: UOB financial snapshot E 212E 213E Year-end 31 Dec (S$ mn) E 212E 213E YoY% YoY% YoY% YoY% 1Q11 QoQ % YoY% P&L statement Net interest income 3,674 3,31 3,876 4,1, Non-interest income 1,61 1,84 2,16 2,173 2, Total revenue,284,376,892 6,67 7, , Operating expenses -2,7-2,28-2,461-2,689-2, Pre-provision operating profit 3,29 3,118 3,43 3,986 4, Loan loss provisions -1, Non-operating income Profit before goodwill, tax 2,318 2,973 3,383 3,871 4, Goodwill amortisation Taxation Net profit (post-pref. dividend) 1,796 2,37 2,68 3,81 3, Cash core profit 1,86 2,368 2,696 3,92 3, Balance sheet (S$ bn) Balances with banks Investments Gross loans Provisions Net loans Total assets Customer deposits Borrowings/debt Total liabilities Shareholders' equity Returns and efficiency (%) Cash core ROA Cash core ROE Loan spread Interbank spread Securities spread Net interest margin Non-int. inc./revenue Cost/revenue Operating cost-to-assets Balance sheet (%) Asset/equity (x) Loan-deposit ratio Tier-1 (reported) Core Tier 1 ratio Total CAR NPLs to loans B/S loan loss coverage Key assumptions (%) Growth in gross loans Overall interest spread Non-interest income growth Operating expense growth P&L provisions (bp of loans) Singapore Banks Sector 2