We believe that most of the bad news has been priced in. We are removingthe 100bps risk premium attributed to banks when we downgraded the sectorin Oct-08 as (1) we believe the financial sector is stabilising – creditdefault spreads has come off, (2) we believe asset quality would not panout as bad as the Asian Financial crisis and (3) banks are wellcapitalised, with room to raise further capital, if necessary. We areupgrading Singapore banks to Neutral and revising our calls. OCBC isupgraded to a Buy (from Hold) while UOB is upgraded to a Hold (from FullyValued).

Easing concerns The Singapore Government had announced financialenhancements for corporates, which we believe would restore confidence inthe credit market. In addition, Las Vegas Sands has also emerged to affirmits continued committed collaboration to facilitate the completion of theMarina Bay Sands Integrated Resorts project. Meanwhile, we expect positiveactions from the budget to be tabled in January to help boost confidence inthe economy.

Not as bad as Asian Crisis While corporate credit risks have risen, webelieve it is not as bad as the Asian crisis cycle. For developers, whichhave been the key concern for banks in terms of asset qualitydeterioration, we note that developers are in better financial positionsthis time around compared to the previous cycle, judging by their gearing,interest cover and operating cashflows.

Prefer OCBC We prefer OCBC as we believe there could be upside surprisesfor its insurance business as GEH’s underlying business remains robust. Inaddition, OCBC is currently expanding its Islamic banking business inMalaysia which could support NIM expansion. The current valuation of OCBCis already reflecting the dismal contribution from GEH and NPL ratios of3-4%. We think that there is limited downside for OCBC and it has anelement to spring a surprise with its insurance outfit. We upgrade OCBC toBuy (from Hold) with TP revised upwards to S$6.00 (from S$4.40). Ourvaluations are based on the Gordon Growth Model with an implied 1.1x FY09BV. Our trough fair value or worst case for OCBC at S$3.81 reflects NPLratio of 5-6% and provision charge off rate at 150bps, which we think isunlikely.