Singapore Banks: Look ahead

- Unexciting 4Q10 results largely dragged by lower non-interest income; FY10 earnings grew 30% mainly from lower provisions.
- NIM compression will prevail but muted compared to 2010; net interest income supported by 11% loan growth in 2011.
- Expect 7% and 17% earnings growth for 2011 and 2012; topline driven.
- Still prefer OCBC (Buy, TP S$11.30) to UOB (Buy, TP S$21.70)

Mixed 4Q10 results; achieved 30% FY10 earnings growth. 4Q10 results were mixed: DBS was inline, OCBC was below expectations due to lower insurance contribution while UOB was inline excluding one-off gain from sale of UIC shares. Overall, earnings contracted qoq due to lower non-interest income. Net interest income held up as NIM compression stabilized (except for UOB, which saw the biggest decline) supported by loan growth of 4% qoq. Expenses increased qoq due to higher staff costs. OCBC saw one-off merger costs of its Indonesia operations during the quarter. Provisions remained benign.

Loan growth to remain strong in 2011 at 11%. Post 2010 results, we have revised our loan growth forecast for Singapore banks up to 11% (from 8% previously). NIM compression will remain a feature for Singapore banks in 2011 but an 11% loan growth would be sufficient to ensure net interest income grows at 11% with a 5bps NIM compression compared to a 3% contraction in net interest income with a 23bps NIM compression. For now, we still expect a visible SIBOR uptick only in 4Q11. An earlier than expected SIBOR uptick would be a key re-rating catalyst for the Singapore banks.

Earnings growth to only rev up in 2012. Earnings growth may not be attractive in 2011 at 7% due to continued NIM pressure with low SIBOR despite sustainable and strong non-interest income traction but higher expenses and benign provisions. The SIBOR re-rating coupled with sustainable growth in non-interest income could rev up earnings growth to 17% in 2012.

Valuations remain undemanding vs.region; still prefer OCBC to UOB. Singapore banks are still the cheapest within ASEAN with solid asset quality and robust capital. ROEs are edging upwards and back to 2007 levels when Singapore banks traded at average 1.8x forward BV vs. current 1.3x FY11 P/BV. We still prefer OCBC to UOB for better non-interest income traction and lower slippage in NIM. UOB will aggressively gear up its regional operations this year and may see further NIM pressure in 1H11.

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