• We expect book value decline for UOB in 1Q09 of 7-8% q/q vs. close to 1% decline for OCBC and DBS. This should lead to further underperformance by UOB, as was the case post 4Q08 results. We continue to prefer DBS in the sector on valuations (0.87x 2009E book) and relatively better expectations on net income and book value.

• Despite YTD outperformance, we recommend a Long DBS/Avoid UOB trade on the back of this analysis. 1Q09 results for the Singapore banks are out in a month’s time, (UOB 6 May, DBS 8 May), which should provide catalyst for the trade. We believe OCBC remains at risk from negative earnings momentum in 1Q09.

• In case UOB book value does decline by a large 7-8%, we do not deny possibility of the bank raising further capital. Tier 1 ratio for UOB is the lowest among the three banks and core T1 ratio (including AFS losses) stands at just 6.8% as per our calculations on 4Q08. This, combined with worsening asset quality, pro-cyclicality of Basel II and continued erosion of equity, should lead to higher probability of capital raising by the bank.

• For DBS, the book value decline should be relatively muted due to macro hedges (S$32bn of derivative receivable/payables in 4Q08) and a lower risk AFS portfolio composition (4% equity, 56% gov’t sec) while for OCBC, the key positive is relatively lower exposure to financial institution securities (9% of AFS), in addition to a high concentration of govt sec (58%). Overall, we expect FY08 book value trends to continue in 1Q09E (UOB -18.4%, OCBC -5.8% and DBS -3.5% in 2008).

• Key risks to our call include lower than expected book value erosion at UOB and negative outcome on book value / earnings at DBS, while GEH continues to be the key risk for OCBC.