1Q2009 P&L marks the trough, start of an earnings upgrade cycle UOB and OCBC produced better than expected results: robust net interest margins, strong non-interest income, lower operating costs. In particular, while market was expecting major NPL/credit costs hikes, UOB and OCBC were sufficient to positively surprise the market. We think 1QFY09 could well mark the inflection point: Singapore banks’ strong preemptive provisioning track-record, and potential Singapore GDP trough in 1QFY09, may set earnings on the path to early recovery. We revise our 2009E-11E EPS estimates by -14% to +41%, and expect a wave of earnings upgrades as investors readjust expectations. With this report, David Ng assumes primary coverage of DBS, UOB, and OCBC.

(1) Recession costs remain manageable. Although we see NPLs doubling, the magnitude remains below the levels experienced during the Asian Financial Crisis, and Singapore banks have a stronger earnings buffer; (2) opportunities to increase market share as foreign banks pull back; (3) better NIM performance, improved loan pricing partly offsetting lower spreads from lower rates; and (4) robust capital position, no major recap needs.

Except for UOB, both DBS and OCBC are still trading below their 1996-2008 P/B median. Given Singapore banks’ stronger resilience, relative capitalization vs. regional peers, and attractive yields, we expect Singapore banks’ shares to close the gap, and return to their mid-point valuations. DBS remains our top pick in the sector, add to Conviction Buy (from Neutral), given its more undemanding valuations, and high dividend. With its enlarged balance sheet, it can aggressively gain market share as foreign banks pull back from Singapore, and grow exposure to Greater China, which is seeing some recovery. Reiterate Buy on OCBC, as we think market has not fully appreciated its earnings resilience. UOB remains at Neutral: though UOB’s solid 1QFY2009 results should ease concerns over recap/asset quality issues, we think the market will need further evidence of sustained growth recovery for further re-rating. We raise our TPs by 26%-50%.