Singapore banks - Patience needed


■ Soft earnings outlook appears priced in; we expect valuation to limit downside risk

■ A better than expected NPL cycle and a Fed funds rate hike could be catalysts

Preferred stocks are UOB and DBS

A soft earnings outlook
One of the key takeaways from the 3Q15 results season was that it further highlighted the slowing EPS growth trend since last year. This trend is likely to persist into 2016 in our view, as loan growth remains soft, NIMs consolidate and credit costs pick up. We expect sector EPS to contract 3% in 2016.

Valuation should limit downside risk
SG banks have underperformed peers in APACxJ after falling 19% YTD in USD terms. With the sector now trading at 1x Dec 2016e BV and 10x 2016e EPS, we believe the soft earnings outlook is largely priced in. Our valuations are based on forecasts that reflect rising credit costs and fairly muted loan growth and NIM assumptions. Both in PE and PBV terms, the sector is hovering significantly below historical means.

Patience needed
Cheap valuations alone are unlikely to re-rate a stock; without a re-rating catalyst, stocks could end up being a value trap. In the short term, we think patience is needed for a catalyst to materialize given the headwinds in the sector. We believe that the sector could re-rate again once the market becomes more comfortable with the asset quality outlook. Another potential catalyst is if NIM starts improving again and this could be contingent on a Fed funds rate hike.

Buy UOB and DBS
UOB is one our preferred picks. Although the stock is trading in line with the sector average valuation multiples, it is hovering at more than 1SD below its average historical valuation multiples. For DBS, we like the stock because of the concrete improvements seen since 2009. Even though it no longer trades at a discount to peers, we believe that the stock’s current valuation is justified. We expect the stock to re-rate just like UOB when positive catalysts emerge. (Read Report)

Source : HSBC Global Research

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