Bank stocks have increased by 20% since Apr 30, outperforming the FSSTI marginally by 4ppt. Aside from a solid set of 1Q09 results, we believe the outperformance is also attributable to growing confidence in the quality of book values. Following the run up, the sector now trades close to its 1.4x PBV mean. While we still believe that banks have solid fundamentals, we would not be chasing the stocks so aggressively at these price levels.

After rising 15% since Apr 30, OCBC now trades close to its 1.6x PBV mean. At these levels, we think much of the bank’s strengths and fundamentals has been priced in. Hence, we downgrade OCBC to Neutral from Buy but maintain our S$6.90 price target. UOB is still our top pick while DBS remains as a Neutral.

Continue to hold the view that Singapore banks have sufficient earnings to absorb higher credit costs in 2009-10 and that RoEs will normalize by 2011. However, we recognize that stock prices will be volatile as the asset quality cycle absorbs the shocks in the economy. We think this will provide opportunistic entry points. We see better entry points into DBS at S$9.00 (0.8x Dec 10E BV) and OCBC at S$5.50 (1.1x Dec 10E BV).