Published March 11, 2009

Bank stocks look cheap but have yet to hit bottom

Analysts warn of rises in provisions, non-performing loan ratios of local banks

By TEH SHI NING
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LOCAL banking stocks may look cheap at the moment, but most banking analysts remain neutral on the sector, as the price falls are not without reason.

Other than a sharp deterioration in earnings in the fourth quarter of last year due to increased loan loss provisions, Singapore's banks have seen book values fall too, due to 'unrealised mark-to-market losses on their available-for-sale investments', Kim Eng analyst Pauline Lee said in a note released yesterday.

UOB was worst hit in this respect with $3 billion taken off its reserves, more than double those of DBS and OCBC, said Ms Lee. It also had the largest provision charge write-off but, cushioned by operating profits, managed to outperform DBS and OCBC with a smaller dip in earnings.

Expecting UOB's asset quality to 'deteriorate less severely than the other banks', DMG & Partners analyst Leng Seng Choon issued a 'buy' recommendation on UOB in his March 4 note. He issued a 'neutral' on the other two banks, as well as on the sector overall.

Kim Eng's Ms Lee also remained neutral on the sector, with a 'hold' recommendation on all three banks and preferring 'entry level at deep values'.

The local banks are trading at price to book values (PBVs) of 0.64 to 0.92 times, by Ms Lee's estimation. 'We reckon the sector's forward PBV will only hit bottom at the trough of the GDP,' she said.

CIMB-GK analyst Kenneth Ng, who maintained an underweight on the banking sector in his March 3 note, also said that while current valuations are not unreasonable, it is too early to 'call a bottom' on the banking stocks.

'Banks tend to stay cheap as long as doubts on the extent of the credit cycle remain,' he said. Issuing an 'underperform' rating on all three banks, Mr Ng prefers DBS in the short term as 'its valuations are closer to Asian-crisis trough levels', with OCBC as second choice, followed by UOB.

DBS's Singapore research team remained neutral on the sector too. In a March 6 note, it issued a 'hold' on UOB due to concerns about deterioration in its book value, but a 'buy' on OCBC for its 'relatively robust core banking profit', higher capitalisation position and expansion into Malaysia's Islamic banking business.

Looking ahead, the analysts also warned of further increases in provisions and non-performing loan ratios among the banks in 2009, possibly matching levels seen during Sars though they are not expected to hit Asian crisis levels.

Yesterday, bank shares rebounded, with DBS closing at $6.75, UOB at $8.33 and OCBC at $4.08.