Singapore bank stocks are up more than 10% day before, with no specific news for the sector. We believe this to be more of an asset allocation shift in favor of large and liquid stocks, with reasonable valuations and relatively limited balance sheet and earnings risk. This is further aided by recent appreciation of S$, probably signaling that the worst on Singapore economy has passed with -5.6% and -11.5% GDP prints in 4Q08 and 1Q09, respectively. Sector specific, the securities writedown cycle appears to be reversing, complemented by lower probability of a severe loan loss cycle as pace of economic decline slows. The trade appears to be ‘stay the course’.

We expect S$269mn for DBS, S$224mn for OCBC and S$277mn for UOB in 1Q09. Our estimates remain below Street due to expectations of higher credit costs (avg. 29bp, not annualized) on back of 11.5% decline in 1Q09 GDP, higher unemployment and still difficult liquidity for relatively weaker borrowers. SME and consumer loans should be key pressure points. UOB and OCBC announce results on 6th at lunchtime, while DBS would announce on 8th before market.

For revenues, we expect banks to benefit from treasury income as the yield curve remains steep (Singapore 3M-10Y at 170bp in 1Q09). At the same time, we expect NIM to remain under pressure due to lower deposit spreads as 3M Sibor declined 40bp q/q to 0.73% in 1Q09. Loan spreads remain high as pricing power stays with the banks but given the low-cost deposit franchise of the Singapore banks, we believe margins overall should remain under a bit of pressure. The key factor that may lead to better margins would be ALM, depending on whether the banks took on duration risk.

For UOB, one of the biggest concerns is book value decline and possibility of permanent impairment in the securities book. While for OCBC, in addition to asset quality, we remain worried on GEH earnings. DBS should face margin pressure due to low Sibor but extent of ALM and treasury gains would be important. Also, we expect some degree of clarity on succession planning during 1Q09 briefing.

We maintain our OW on DBS and N on OCBC and UOB into the result season. The key upside risks should come form lower credit costs and higher treasury income.