Following the FY08 reporting season for the Singapore banks, we have rolled over our forecasts, taking a conservative view on the outlook. Despite this, we find the banks offering a relatively strong shelter during the current downturn.

All three Singapore banks have strong capital ratios, with Tier 1 capital of 10.9–14.9%. In addition, their loan-to-deposit ratios of 79–86% are backed well by strong retail deposit franchises, providing ample liquidity. On the investment securities, we note that the three Singapore banks’ AFS securities amounted to 11–15% of total assets. Of this, non-government securities accounted for 5–9% of total assets. We believe that while the risk of further mark-to-market losses is possible, it is not expected to result in significant tangible losses for the banks.

Our estimates indicate that in order for FY09 net profits to be wiped out by additional loan loss provisions, the banks will need to run NPL ratios of between 5.8% and 7.0%. This is almost double our current assumptions of 3.7–4.4%. Rather than expecting NPLs to peak this year, we believe they will do so in FY10, on the assumption that there is a lag in the rise of NPLs.

The sector is currently trading at FY09E PER, P/UP and P/BV of 13.6x, 5.3x and 0.8x, respectively. Compared with their historical trading range, we note that both P/UP and P/BV are lower than two standard deviations below their historical mean. Even on a P/NTA, the sector’s FY09E multiple of 1.1x is close to the historical mean P/BV, which in our view is attractive.

We maintain our top pick of DBS Group (DBS SP, S$6.90, Outperform, TP: S$10.74), followed by OCBC (OCBC SP, S$4.11, Outperform, TP: S$5.66) and UOB (UOB SP, S$8.27, Outperform, TP: S$11.92). Near-term catalysts for the sector include potential earnings resilience from better margins and lower-than-expected NPLs.