JPM: Singapore Banks: Low season

Singapore banks appear to be wedged in a position of active inertia. The banks have means to deliver RoE growth but intensifying competition, lack of inorganic growth and a transition in strategy are stumbling blocks in the near term. This phase of curtailed activity should be further compounded by low rate/low credit demand environment. We expect limited catalysts for these stocks in the next three to six months, hence maintain an UW rating on the sector versus both Singapore and Asia ex financials universe.

· Margins for the sector should continue to remain under pressure as loan spreads have peaked and are on their way south. The pricing power of 4Q08/1Q9 has reversed as high system liquidity and improving risk appetite has led to return of competition. Liability spreads on the other end continue to remain almost negligible as benchmark rates are at record lows – and should continue there for at least rest of the year.

· Loan growth for the sector should pick-up only by 4Q09 as credit demand would lag the rebound in economy. As of now, loans are simply shifting from construction to mortgages as buildings get completed. The key to growth is revival in business loan demand. As of now, excess capacity and still misty outlook is preventing the corporate sector from gearing back up. Also, banks are still competing at the lower end of the risk curve. We expect both of these demand/supply factors to change over next two three months but financial impact should only be evident in 4Q09 results.

· Sector has missed lucrative opportunity of transformational inorganic growth in 4Q08/1Q09. The probability increasingly is of an uneasy trade-off between sustained low RoE and an expensive deal. At this point in time, opportunities do exist but few and far between with only sharp deal-making capabilities resulting in RoE enhancing transactions. While we view this more as an opportunity but waiting for Godot has not yielded positive returns, hence we would rather wait for any deal to be concluded before giving the banks any benefit of doubt.

· The banks are in transition stage, with DBS CEO designate Piyush Gupta joining in November, UOB making a shift from a significantly conservative outlook of last six quarters to a growth oriented one and OCBC aligning itself to a world of tighter spreads. These phases invariably lead to lack of significant game-changing initiatives but recently reported bid for ING Asian Private Banking business by DBS and higher competition by OCBC and UOB provide hope for a different (positive!) outcome. We maintain OW on UOB and DBS and Neutral on OCBC, with Long DBS/Short OCBC as a near term trade.