Event:
The Monetary Authority of Singapore (MAS), in a widely anticipated move, announced fresh regulations for local banks. The new rules are more benign than expected and all three domestic banks should be able to meet the requirements comfortably. In our view, this move sends a positive signal about Singapore’s status as a safe banking hub, which will benefit the sector as a whole.
Our View:
The latest MAS regulations build upon the international Basel III agreements reached at the end of last year. Though they are more stringent, as MAS rules have always been, we expect the three local banks to have already met them (even after accounting for the differences in their current capital calculation). These rules are to be in place by 2013 compared to the 2015 deadline for Basel III.
Many international banks are scrambling to adhere to Basel III, in particular the Core Tier 1 ratio requirement of 7% (previously 2%). While this could come at the cost of their ability to pay dividends and/or embark on aggressive deleveraging or equity‐raising, it will be to the advantage of Singapore banks which have historically been “penalised” for poor ROEs due in part to lower leverage. Moreover, media reports have suggested an additional 2‐2.5% of Core Tier 1 ratio for large global banks deemed to be systemic risks, which could exacerbate this situation further and discourage size growth.
The three Singapore banks are among the most capitalised in Asia, with Core Tier 1 ratios of 11.5‐13%. At 13%, UOB has the highest Core Tier 1 ratio, putting it in a very safe position. In comparison, most Hong Kong banks have Core Tier 1 ratios of 8‐10%.
Action & Recommendation:
We are positive on the banking sector and keep our target prices unchanged. OCBC remains our top pick. Since our last update in May, DBS has fallen by 3.5%, with UOB gaining the same percentage. We upgrade DBS to BUY (previously HOLD) as valuations now look more attractive and downgrade UOB to HOLD (previously BUY).
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