Singapore banks:Hopes are deflating

Hope fizzles out. Singapore banks are up 19%-25% YTD vs. 15% for the FSSTI due tohopes of improving asset quality and revenue growth, which were fuelled by previouscomments made by banks. However, recent 2Q17results have deflated these hopes withstock prices down 1%-5% since 27July when OCBC first reported.。

    Mixed revenue performance. OCBC performed the best with total income and EPSgrowth accelerating for two quarters. OCBC’s 2Q17total income and EPS rose 17% y-o-and 22% y-o-y respectively. In contrast, DBS had a muted performance with total incomegrowth slowing since 2Q16and grinding to a halt in 2Q17. UOB has had mid-single digittotal income and EPS growth for the past two quarters.。

    No surprises from asset quality and loan growth. 2Q17gross NPL and credit costcame in within expectations with no slippage in asset quality. However, loan losscoverage has fallen close to 2008/09Global Financial Crisis levels and banks do not lookas if they are rebuilding their coverage levels. Aside from OCBC, whose loans rose 2% qo-q, loan growth at UOB and DBS came in as expected at -/+1% q-o-q.。

    NIM strength was due to gapping activity. Both UOB and OCBC saw 2-3bp q-o-q NIMimprovement but this was due to gapping activity. Whether this can be sustained isuncertain. DBS’ NIM was flat q-o-q.。

    Resetting expectations. 2Q17reflected challenging top-line growth prospects as assetquality risks remain contained. All banks are guiding for firmer NIM due to rising interestrate expectations. The broad guidance is for marginal NIM improvement and mid-singledigit credit growth. On a negative note, DBS sounds more cautious on asset quality risksthan it has in the past three years.。

    OCBC remains our top pick. Until we get more concrete evidence that revenue willgrow in a more meaningful manner, the sector may remain range-bound. The sector isnot especially cheap at 11x 2018e EPS and 1.1x Dec 2018e BV, which is in-line with itsmean valuation multiples post-2009. Our preferred stock is OCBC because we believe itis back in growth mode and it is the only bank still trading at its mean PE multiple while itspeers have already overshot their mean PE multiples.。