Singapore banks have prepared themselves to weather the financial crisis by beefing up their balance sheets. Having survived the financial crisis, their strong capital base is a blessing as it positions them for expansion in Singapore and the region. Gaining market share as foreign banks retreat. Singapore banks did not compete aggressively for market share in the heady days of easy credit in 2007 and 1H08.

However, they expanded market share for S$-denominated loans by 3.2ppt to 58.7% in 4Q08 and 1Q09 after the collapse of Lehman Brothers as foreign banks retreat. There was a noticeable 2.9ppt increase in market share to 20.9% for DBS Group Holdings (DBS) in 2H08 and 1Q09. Oversea-Chinese Banking Corporation (OCBC) lost market share in 2008 but the magnitude is minuscule. United Overseas Bank (UOB) has kept its market share steady at 20.9%.

Credit freeze has started to thaw. Trade flows have started to normalise as availability of trade finance facilities, such as letters of credit and bank guarantees, has improved. Sales of private residential properties by developers have surged with buyers taking advantage of the current low interest rates and availability of the interest absorption scheme. We expect these positive trends to boost lending for general commerce, building & construction and housing loans.

Systemic risk much reduced. Spread for credit default swaps (CDS) of Singapore banks have normalised to about 100bp, a two-third correction compared with elevated levels of above 300bp when Lehman Brothers collapsed in Sep 08. They are at similar levels compared with CDS for sovereign wealth fund Temasek Holdings, which currently trades at 90bp.

Singapore banks are trading at the lower end of historical P/B bands at about one standard deviation below long-term averages. DBS is the most attractive with a P/B ratio at 1.13x, followed by OCBC at 1.42x. We have changed our sector call for Singapore banks from MARKET WEIGHT to OVERWEIGHT after upgrading OCBC to BUY last week. Systemic risk has been reduced, paving the way for valuations to recover to pre-crisis levels.

Singapore banks have prepared themselves to weather the financial crisis by beefing up their balance sheets. DBS, OCBC and UOB have raised a total of S$5.3b through issue of preference shares in 2008. In addition, DBS completed a 1-for-2 rights issue in 1Q09, raising S$4b. Having survived the financial crisis, Singapore banks’ strong capital base is a blessing as it positions them for expansion in Singapore and the region.