• Banks at historical highs
• Buoyed by positive outlook
• Raising fair value to S$30.10

Re-rating of Banking Stocks

The recent re-rating of the banking sector has seen Asian banks enjoying higher valuations from the recent trough in 2016, especially Singapore banks which saw the main drag from the oil and gas sector in 2016. At the low, most Singapore banks were trading below historical 1x book, but bank stocks have since rebounded to about 1.4-1.5x currently.

Regional banks are currently trading at about 1.6x book. This trend was clearly seen for all three local banks, which are all trading at new historical highs in Jan 2018. In a generally benign market, where inflation is under control, economic growth is healthy (based on Bloomberg consensus growth projection for the Asia Pacific region at 4.7% in 2018 and 4.5% for 2019), interest rates are rising gradually and corporates are enjoying good earnings growth in the region (for example, the Hang Seng Index stocks are projected to enjoy earnings growth of 11.6% in 2018 and 20% in 2019), banks are likely to be in a strong position to enjoy this trend. The current valuations are likely to hold, barring no deterioration in economic outlook or operating conditions.

Banking Stocks Enjoyed Good Gains

Last year, the three local banks saw share price appreciation of between 30%-43% (average of 37%). Despite last year’s strong outperformance, the local banks continued to post good gains this year. So far this year, the average gain is about 8%.

Increasing Fair Value to S$30.10

We expect broad-based growth in both the Net Interest Income and Non-interest Income for 2018. Fee Income should also enjoy a boost from better Wealth Management earnings and Credit Card operations. We are projecting earnings growth of 10.8% in FY18 and 14.7% for FY19. With the recent re-rating, we have also raised our valuation peg to 1.3x FY18 book. This increases our fair value estimate from S$25.36 to S$30.10.

Source: OCBC Research - 26 Jan 2018