Still too early to turn positive — With bank consensus estimates down 23-35% from their peak, arguably much bad news has been discounted. Discussions with investors suggest that slower loan growth, weaker markets-related income and higher NPLs/provisions are known, but the impact of low short-term rates and flatter yield curves on margins may provide a further 2009E downside surprise. Weak 4Q GDP data with an expected 6-8% contraction in 1Q09E suggests that it may be too early to turn positive on banks despite a sentiment lift from an expected aggressive budget package on 22 Jan. UOB remains our top Sell on valuation grounds.

4Q08 GDP fell 2.6%yoy, 1Q09 may contract 6-8%yoy — Citi economists expect 2009 GDP to contract 2.8% YoY, surpassing the Asian Crisis and 2001 tech bust. A sharp slowdown in services compounded continued manufacturing contraction. This sets the stage for aggressive fiscal stimulus in the Jan 22 budget, but we still expect two quarters of further contraction before turning positive in 4Q09.

Nov-08 loans -1%mom, first fall since Dec-06 — System loans of S$273bn, while up 21% YoY shrunk S$3bn from Oct-08. Business loans (S$160bn) fell 2.2%mom (-S$3.6bn); particular weakness in transport and non-bank FI loans. Consumer loans (S$114bn) rose +0.8%mom (S$0.8bn), mortgage growth +0.5%mom. Offshore (ACU) lending was also weaker, falling 2.5%mom (-S$8bn) to S$306bn.

Margin pressure our key concern for 2009E — The table below highlights our current 2009E forecasts versus Bloomberg consensus and 4Q08E versus 3Q08 actual. 12-month forward consensus estimates have now fallen 23-35% from peak versus 30-40% in past bear market cycles. Overall, we believe that weaker-than-expected margins could provide further downside earnings surprise into 2009E.