In 2008, the majority of Singapore and Malaysian banks saw their marked-to-market (MTM) reserves (in the balance sheet) for available- for-sale (AFS) securities dipping into the red. Within the Singapore and Malaysian banks, UOB has the largest AFS deficit (Exhibit 1), while Maybank was the only bank that recorded a sharp turnaround in AFS reserve – from a deficit in 2007 to a positive number in 2008. OCBC, Bumiputra-Commerce, RHB Capital and Maybank have a positive AFS reserve as of December.

We are concerned with the balance sheet impact if all these MTM losses materialised. In this report, we assess the impact on tier-1 and capital adequacy ratio (CAR) assuming the worst-case scenario of all paper losses turning into real losses. For the sake of being conservative, we assume that all paper gains will disappear.

Under our worst-case scenario, UOB will be the most affected, given its outsized AFS deficit. We estimate UOB’s tier-1 ratio could decline to 9.3% (from 10.9%) which is slightly above their internal comfort level of 9%, making its capital ratio the weakest within Singapore banking universe. As discussed in our sector note entitled “Unlocking the AFS mystery” dated 6 March, we believe UOB’s outsized AFS deficit lies in its larger exposure to riskier corporate papers and papers issued by financial institutions. At 9.3%, UOB’s tier-1 ratio is still higher than that of most Malaysian banks. Exhibits 3 and 4 show that the impact on the rest of Singapore and Malaysian banks is marginal.

We prefer Singapore to Malaysian banks given the former’s cheaper valuation, stronger management and better asset quality. For Singapore, our top pick is DBS whose valuation gap has widened to levels we consider as unwarranted. For Malaysia, Public Bank is our top pick due to the lack of credible investment banking alternative.