■ 3Q15: Headline growth masks underlying weakness
The headline 3Q15 performance of Singapore banks was mostly not reflective of the weak growth in their core businesses. Excluding the strong trading investment income, both loan growth and fee income performance was weaker than expected. Bank managements have further guided down their underlying top-line growth expectations, with the US rate cycle being a key variable.
■ Asset quality: Confidence mismatch likely to persist
There appears to be a wide gap in terms of market perception and bank managements' confidence in the asset quality of their loan books. Market is understandably worried about: a broad-based growth slowdown, a potential rise in Singapore shortterm rates, a weak property market and persistent softness in commodity prices. But managements remain very confident about the asset quality outlook. While stock prices seem to be pricing in 60-65 bp of credit costs, banks are budgeting for 30-35 bp. We believe it will likely take more than one quarter to convince markets that all is well with the banks' asset quality.
■ Lowering top-line growth expectations; DBS remains our top pick
While we remain constructive on the asset quality outlook near term, the growth outlook has worsened at the margin. We trim our EPS estimates by 0-8% driven mainly by lower top-line assumptions. We also cut our target prices for DBS to S$22.00 (from S$24.00), UOB to S$22.80 (from S$24.50) and OCBC to S$9.90 (from S$11.20). DBS remains our top pick with better earnings momentum and lower asset quality risks. OCBC arguably has the least provision buffer to handle asset quality normalisation. (Read Report)
Source : Credit Suisse Asia Pacific Equity Research