Going into the Singapore banks’ reporting season next month, among the three banks, we expect UOB to report better net profits than its peers both in absolute terms as well as YoY and QoQ comparisons. However, on a 12- month view, DBS (DBS SP, S$8.95, OP, TP: S$10.74) is still our top pick for the sector, followed by UOB (UOB SP, S$10.94, OP, TP: S$11.92).

We estimate net profits of S$0.98bn, 44.0% lower YoY but 5.8% higher QoQ. Even though we expect ongoing deterioration in asset quality, we believe loan loss provisions may be lower QoQ, on the assumption that there are less of the chunky corporate NPLs than 4Q08. At the same time, margins are expected to fall by 7bp, largely on lower yields from interbank and securities assets.

Loan growth is expected to better the broader sector’s contraction (-0.6% YTD and -0.2% MoM) in that we are expecting marginal 0.6% QoQ improvement. Among the banks, we are anticipating a 0.9% QoQ improvement in loans for UOB, which should be the best among the banks.

Non-interest income is estimated to contract by 31% YoY and 4% QoQ for the sector. Among the banks, OCBC is expected to see the largest YoY contraction of 44.8% together with DBS’ 35.2%. However, we believe UOB could see the largest quarterly decline at 13.2% QoQ, among the three banks.

The banking sector is currently trading on FY09 PBV, PUP and PER of 1.1x, 6.9x and 17.7x, respectively. Historically, the FY09 PBV of 1.1x is near the two standard deviations below the historical mean.

DBS (DBS SP, S$8.95, OP, TP: S$10.74) is still our top pick for the sector, followed by UOB (UOB SP, S$10.94, OP, TP: S$11.92). However, should UOB meet our estimates and report stable NPLs as well as less than anticipated mark-to-market losses on its AFS securities, it may see some recovery in its share price.