Singapore Banks Sector

AFS book value watch: 1-5% negative impact in 3Q11; UOB most affected

● Singapore banks report 3Q11 results starting with DBS and UOB  on 2 November and OCBC on 3 November. We estimate the potential book value impact on banks in 3Q11 after incorporating asset price movements during the quarter.
● Overall, Singapore banks’ Available-For-Sale (AFS) books mainly comprise government securities (50–60%), followed by corporate debt securities (30–35%) and equities (5-10%). DBS, UOB and OCBC have actively increased the proportion of government bond securities in their AFS books since 2008–09.
● Since June, government bonds have been up 2–5%, offsetting the negative impact from falling equities (down 15–20%) and corporate bond prices (down 1–4%). All Singapore banks (DBS -0.5%, UOB -4.6%, OCBC -2.9%) could see a negative book value impact in 3Q11, with UOB affected the most due its European exposure.
● We maintain UNDERWEIGHT on banks in the Singapore market context. Downside risks to all earnings drivers have risen. Overall macro environment (slowing growth, low rates and flattening yield curve) is unlikely to help the sector’s outperformance near term.

Government bonds were up 2–5% in 3Q11

Government bonds were up 2–5% in 3Q11 with yields falling across the board—the Asian sovereign index was flat in 3Q11, while the global sovereign index was up 2.5% QoQ.

Corporate bonds slightly softer (flat to 4% down) in 3Q11; the real pain will be from equity prices (down 15–20%) Higher grade corporate bonds held up relatively better. Since the global financial crisis of 2008–09, Singapore banks have been actively shifting their corporate debt towards higher-grade names.

AFS valuation reserve

Government bonds: We assume a 1-2% rise, in line with falling yields.
Corporate debt: For DBS and OCBC, we assume a 2% fall in corporate bond prices. For UOB, we assume a 5% fall, to factor in the weakness in European bank debt securities (S$1.5 bn = 12% of
corporate debt).
Equities: Equity indices fell 15-20% on average during 3Q11 (Singapore STI index was down 14% during 3Q11). We assume a conservative 20% fall in our calculations.

Singapore banks—valuation summary