Published October 22, 2008

Local banks' shares continue sliding

Analysts bracing for more write-downs and nasty numbers

By SIOW LI SEN

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INVESTORS continue to sell down bank shares yesterday as they expect earnings to be hit by a recession, which will bring the prices down to below book value.

Writing on Monday, Morgan Stanley analyst Matthew Wilson said that previous recessions have seen significantly lower price-to- historical book multiples - between the 0.8 times during the 2002-2003 recession and the Asian crisis's 0.6 times.

On Monday, DBS was trading at one time book value, while OCBC and UOB were at 1.3 and 1.4 times estimated full-year 2008 earnings respectively.

Kim Eng analyst Pauline Lee, who revised her numbers for Singapore banks, said: 'As the global financial crisis has already led Singapore into a recession, it is justified that the valuations for the Singapore banks could drop to below one time PBV (price book value).'

'We have revised our worst-case analysis for the Singapore banks by considering a full write-off of their CDO (collateralised debt obligations), and derive book value per share for 2009 of $13.70 for DBS, $12.70 for UOB and $5.40 for OCBC,' said Ms Lee.

DBS Group Holdings, United Overseas Bank and OCBC Bank were the top losers among the component stocks in the Straits Times Index yesterday. DBS eased 40 cents to $12.64 and is down 40 per cent year-to-date. UOB ended 28 cents lower to $15.32 and has fallen 23 per cent from Jan 1. OCBC closed 20 cents down to $6.18 and is off 25 per cent for the same period.

Analysts say that the upcoming third quarter results may not reflect fully the recessionary impact on earnings as the situation in Singapore has not deteriorated yet.

Loans growth is still positive but they are bracing for more write-downs and nasty numbers coming from the banks' treasury activities.

'Global growth is slowing sharply, Singapore is in recession and the property market is cracking. In our view, it is too early to bottom feed on the Singapore banks,' said Mr Wilson. While they may rally on reasonable 3Q08 results, these results will not yet reflect the deteriorating environment, he said.

He listed four key risks for the banks - earnings, credit, brand damage and balance sheet.

Mr Wilson's price targets are $12.50, $14 and $5.50 for DBS, UOB and OCBC respectively.

On a more positive note, BNP Paribas analyst Ng Wee Siang said that the banks are well-capitalised and can cope with a financial crisis.

'We also draw comfort from the fact that banks remained in the black even during the bleak 1997-98 Asian financial crisis period.'

But Mr Ng said that he remains cautious 'and sees rising risk of share prices overshooting on the downside'.