AIO Finance Analysis

Goldman tells investors to sell S'pore banks

Call comes after key index drops 22 per cent from Oct peak. Investors should sell shares of Singapore's DBS Group Holdings Ltd and its two rivals on expectation the banks' earnings growth will moderate, Goldman Sachs Group Inc said.

It's 'time to take profit, not bottom fish' after the city-state's lenders have fallen about 20 per cent from late last year, Goldman's Singapore-based analyst Tan Bok Chuan said in a report dated Jan 27.
The analyst made his recommendation after the FTSE Strait Times Financials Index, whose 55 members include DBS, United Overseas Bank Ltd (UOB) and Oversea-Chinese Banking Corp (OCBC), Singapore's three banks, dropped 22 per cent from a peak in October.
Any share price gains triggered by interest rate cuts by the US Federal Reserve would present selling opportunities, he said.

'While the macro outlook for Singapore remains resilient despite an expected mild US recession, we are less sanguine on the Singapore banks' earnings outlook,' Mr Tan said.

Yesterday, DBS closed 88 cents or 4.6 per cent down to S$18.06. UOB fell 58 cents or 3.2 per cent to S$17.50, while OCBC fell 20 cents or 2.6 per cent to S$7.60.

The FTSE Strait Times Financials Index fell 3.3 per cent yesterday.
Goldman is keeping a 'neutral' call on the city's three banks.
Mr Tan said declines to S$14.50 for DBS and S$15.50 for UOB would represent buying opportunities.

Investors should buy OCBC when it falls to S$6.80, he added.
Of the three banks, OCBC, owner of Singapore's biggest life insurer, is the city-state's 'most defensive' banking stock, Mr Tan said.

'We like OCBC for its defensive qualities: adequate CDO (collateralised debt obligation) provisions in our view with minimal exposure to the US monoline bond insurers,' Mr Tan said in a report.

OCBC said in November last year that it took a S$221 million 'allowance', or charge, on its asset- backed securities, writing down the value of the investments linked to US sub-prime mortgages to S$48 million as of Sept 30.

The bank has a CDO portfolio of S$641 million.
CDOs are securities that pool loans, bonds or credit- default swaps and use the income to pay investors.

The securities are divided into different parts of varying risk and return.
OCBC is also benefiting from declining interbank loan rates in Singapore, which means the cost of funding its loans is shrinking, Mr Tan said.

Singapore's three- month interbank rate fell to a three-year low on Jan 25, 6.25 basis points to 1.5625 per cent yesterday, data compiled by Bloomberg showed.

A basis point is 0.01 percentage point.

The bank may report net income of S$2.11 billion for 2007, 13 per cent higher than Goldman's earlier forecast, Mr Tan said.
Profit may fall to S$1.98 billion this year, still 14 per cent more than his previous estimate, Mr Tan said.

DBS, South-east Asia's biggest bank, is the 'most at risk operationally', while UOB, Goldman's least favoured of the three Singapore lenders, 'continues to struggle to grow its regional franchise', the Goldman analyst said.

Source: Bloomberg