Our analysis shows that OCBC, the smallest bank with assets of S$85.4b in FY01, aggressively grew its non-Singapore assets by a high 19.6% 7-yr CAGR to the current level. Though a significant part of the growth arose from the 2004 consolidation of GEH (which includes GEH Malaysia), this still shows that the banks are actively engaged in overseas expansion. Our view is that the three Singapore banks are sufficiently large to continue their overseas expansion, and there is no need for further in-market consolidation from this perspective.

The current expense-income ratio is somewhat similar to the levels in FY01. The synergies that were reaped in the first few years after consolidation have been somewhat offset by cost increases thereafter. Anyway, we see cost efficiency only as a secondary reason for consolidation, and not as a primary driver.

All the three banks have capital adequacy ratios way above regulatory requirements. We expect all the banks to remain profitable, despite the recession. Hence, we see no push-factor for consolidation.

In our view, the likelihood of near-term consolidation is low. UOB remains our top BUY within the banking sector. Its less-aggressive lending stance over the past few years and its push into lower-risk home mortgages will help to keep its asset quality high. Our UOB target price of S$11.60 is pegged to 1.2x 2009 book. We have NEUTRAL calls on both DBS and OCBC.

We agree that a larger asset base will provide a bank with more opportunities for overseas growth. However, the experience of the past few years suggest that banks with smaller asset base can also effectively expand overseas.

OCBC, the smallest of the three banks, was the most aggressive in non-Singapore asset expansion over the past 7 years. OCBC’s global asset of S$85.4b puts it as the smallest bank in FY01 (Figure 1). From end-2001 to end-2008, OCBC expanded its non-Singapore assets by a CAGR of 19.6% - this is sharply higher than DBS’ 4.3% and UOB’s 11.7% (Figure 2). Although a significant portion of this expansion arose from the 2004 consolidation of GEH (inclusive of GEH Malaysia), what this shows is that there is good potential for the Singapore banks to further expand overseas, which will help to increase their asset base. We feel that there is no need for further in-market consolidation to drive the banks to expand overseas more aggressively.