SG Banks Strategy

SG Banks Strategy: BNP Paribas rates UOB as its Top Pick with $23.30 TP. (We note of the recent increasing preference for UOB by various houses for the bank’s high quality assets)

House cuts Banks EPS in view of weaker economic outlook, reflecting less sanguine economic outlook. Remain positive on banks and believe they are equipped for further shocks this time around. Sector trades at attractive forward P/E of 11.4x vs historical rolling P/E average of 14x. Based on estimates, sector earnings have to collapse by 17% before taking sector P/E valuations to historical averages. In terms of P/B, banks are valued at 1.3x 2011E BV.

UOB is top sector pick given its earnings resilience and its ability to outperform sector peers in uncertain times. Unlike sector peers, UOB’s earnings are less vulnerable given its large exposure (24% of 1H11’s core operating profit) to the more resilient Thailand, Msia and Indonesia economies.

In uncertain times, OCBC’s 87%-owned Great Eastern tends to present an earnings wildcard given its reliance on the health of capital mkts. On the other hand, DBS’s large exposure to Greater China (26% of group operating profit) and its relatively weaker asset quality could pose a threat to earnings. Note that DBS’s sharper credit quality deterioration during the 2008 global financial crisis.

House sequence of preference is now UOB, OCBC and DBS. In view, SG banks are better equipped for another round of global economic shocks as they have de-risked their balance sheets substantially by writing down CDOs and reducing exposure to EU and US banks-issue debt securities. With core equity tier-1 ratios of at least 11%, SG banks are highly ranked from a global perspective.