Singapore Banks- DBS, UOB, OCBC

CONSOLIDATION is unlikely: In November 1998, POSBank was consolidated into DBS, in the midst of the Asian financial crisis. Then in 2001, in the midst of the economic downturn (Singapore GDP contracted 2.4 per cent then), OCBC Bank acquired Keppel Bank and UOB acquired OUB.

This past consolidation of banks occurred during periods of economic downturn. We are in the midst of another recession now, and some market players are asking whether there could be consolidation within the financial sector.

In our view, the following issues are relevant with respect to the consolidation possibility:

A larger asset base will provide banks with additional capacity to expand overseas - either via organic growth through existing overseas subsidiaries or through inorganic means;

Economies of scale could be enhanced;

The presence of willing sellers and willing buyers.

Our analysis shows that OCBC Bank, the smallest bank with assets of $85.4 billion in 2001, aggressively grew its non-Singapore assets by a high 19.6 per cent seven-year compound annual growth rate (CAGR) to the current level.

Though a significant part of the growth arose from the 2004 consolidation of Great Eastern Holdings (which includes GEH Malaysia), this still shows that the banks are actively engaged in overseas expansion.

Our view is that the three Singapore banks are sufficiently large to continue their overseas expansion, and that there is no need for further in-market consolidation from this perspective.

The current expense-income ratio is somewhat similar to the levels in 2001. The synergies that were reaped in the first few years after consolidation have been somewhat offset by cost increases thereafter. Anyway, we see cost efficiency only as a secondary reason for consolidation, and not as a primary driver.

All the three banks have capital adequacy ratios way above regulatory requirements. We expect all the banks to remain profitable, despite the recession.

Hence, we see no push factor for consolidation.

In our view, the likelihood of near-term consolidation is low. UOB remains our top 'buy' within the banking sector. Its less aggressive lending stance over the past few years and its push into lower-risk home mortgages will help to keep its asset quality high. Our UOB target price of $11.60 is pegged to 1.2x 2009 book value. We have 'neutral' calls on both DBS and OCBC.
Sector - NEUTRAL

Source:
Business Times