AIO Finance Analysis

Singapore banks are expected to release their 4Q07 results from mid-Feb-08. We expect earnings growth of 23% y-o-y for FY07 as a result of overall growth in income. While 2H07 would show marginal slowdown in non-interest income, earnings recorded in 1H07 have held up earnings for the year. Disappointments to earnings, if any, could potentially come from higher than expected provisions from CDO investments.
Outlook - Sentiments are weak although fundamentals hold up. Amid fears of a US and global recession coupled with the weakening of US and European markets, weak sentiments may go against our calls for Singapore banks. In the immediate term, fundamentalists should accumulate on weakness, banking on dividend yields of 4%. Buy calls maintained but target prices lowered. Our Buy calls are maintained although our target prices are lowered in view of higher risks as we lower our sustainable ROE targets and raise our equity premium assumptions, hence cost of equity in our Gordon Growth Model assumptions. We prefer UOB (Buy, TP lowered to S$20.80 from S$27.50) to OCBC (Buy, TP
lowered to S$9.00 from S$10.40).
Source: DBS Vickers