DBS’s underperformance to local peers has become more pronounced this monthfor several reasons. We believe among them are: 1) fear of capital raising; 2) off-balance sheet risk; and 3) potential impairment charge for its Hong Kong franchise.

Standard Chartered’s announcement of a rights issue this week has raised concernas to whether DBS may be next. While DBS has the lowest the Tier-1 ratio among Singaporean banks, its ratio is similar to Standard Chartered after its capital raisingexercise. We believe with a Tier 1 of 9.7% and total CAR of 13.4% a capitalraising exercise is unlikely.

The yearly impairment test may result in a goodwill write down for DBS Hong Kong but its impact is purely accounting as it has no impact on the capital ratios ordividends. Investors have also expressed concern over DBS’s special purposeentities but these should not be confused with the SIVs or conduits as they have noliquidity facilities with the bank. The only risk for DBS involves a cost ofunwinding the structure if they are redeemed early.

We think the wide valuation gap between DBS and UOB is unwarranted as theoperating risks are not significantly different. DBS trades at 0.75x book versusUOB at 1.28x. Our price target is derived from the Gordon Growth Model with aROE assumption of 10.2%, COE of 9.5% and medium-term growth of 4.6%.