Retain Underweight to differentiate our preferences amongst the Singapore banks (our order of preference – UOB, DBS, OCBC). However, we upgrade our industry view to “In-Line” to reflect the impact on global economies and the credit cycle from the vast liquidity injections and the huge directed lending surge in China. Just not compelling: The first decade of this century is shaping up to be a “lost one” for Singaporean banks.

They exited the 97/98 Asian Crisis in relatively good shape but have since failed to leverage that position by increasing their presence meaningfully in the higher return, higher growth markets (for example, Indonesia). With a normalized RoE assessed at 10%, OCBC is our least preferred bank exposure in Singapore. Moreover, the cloud of lending into a Singapore property bubble continues to hang over the stock. On our FY09e estimates, OCBC is trading on 13.4x EPS and 1.6x book, which is fair value at best, if the recovery is V-shaped, and expensive if the recovery is shallow and troubled which is our macro team’s base case.

2Q09 result of S$466m (no one-offs), up 26% QoQ, up 23% YoY and a 20% beat: Revenues increased 5% QoQ with a better investment markets. Net interest income fell 4% with 13bps of net interest margin contraction and 2% loan declines. Non-interest income was up 22% QoQ with strong investment related lines. Opex was up 9% QoQ with higher insurance costs.

Impairment charges fell 47% QoQ – SP declined 50% QoQ but NPLs increased 9% QoQ. Core tier one was 11.3%. Fair value reserves up S$595m (S$748m YTD). Interim dividend of S$0.14ps was declared. Book value increased 4% QoQ to S$4.94.