UNO Template - Google Sites

12 September 2013 Asia Pacific/Singapore Equity Research Banks

Singapore Banks Sector Research Analysts Anand Swaminathan 65 6212 3012 [email protected]

SECTOR REVIEW

FY14 earnings risks: Looking for relative safety Figure 1: Core CS ROE—market implied and under risk scenarios (%) (2014E) Market implied ROE

14.0 12.0

10.7 11.1 10.6

10.0

Base case

11.5

12.0

Normalised

12.1

11.5 10.2

9.7

Stressed

11.4

10.5

9.6

8.0 6.0 4.0 2.0 0.0 DBS

UOB

OCBC

Source: Credit Suisse estimates

■ An imminent slowdown after a record 1H13. 1H13 was marked by record profits for Singapore banks driven by better-than-expected strength in noninterest income and loan growth. But the macro-economic environment in their core markets (mainly Singapore, ASEAN, and India) has seen a visible deterioration over the past few months, thereby increasing earnings risks. While we are unlikely to see significant impact in 2H13, there are material risks to 2014 consensus earnings expectations. ■ 5–22% downside risk to 2014E earnings—OCBC most at risk. We assess 2014E earnings risks under ‘normalisation’ and ‘stressed’ scenarios for various earnings drivers. While DBS appears to be relatively safe under both scenarios, UOB (higher SGD funding costs) and OCBC (SGD/USD funding costs, normalisation in credit costs) appear to be more at risk. The overall downside risk to earnings could be 5–10% under a 'normalisation' scenario and 18–22% under a ‘stressed’ scenario. OCBC’s earnings could be the most at risk under both scenarios if OCBC is unable to repeat its stellar asset quality performance seen during the 2005–09 cycle. ■ DBS remains our top pick—lower earnings risks + valuation catch-up. In our view, DBS has the most potential for upside as P/B multiples play catch-up with the improvement seen in ROEs and relatively low earnings downside under the risk scenarios through 2014E. On the other hand, we find OCBC to be richly valued (market-implied ROEs already higher than our expectations) with potential downside if one of our risk scenarios plays out. UOB remains a defensive play in this environment with valuations close to warranted levels. DBS remains our top pick in the sector. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US

Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS

BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

12 September 2013

Focus charts and table Figure 2: 2014E scenario analysis Assumptions

Impact on 2014E profits (%)

2014E ROE (%)

DBS

UOB

OCBC

DBS

UOB

OCBC

Loan growth (YoY%)

Base case Normalisation Stressed

10.0 7.0 3.9

8.0 6.0 4.0

9.0 6.7 4.2

-1.0 -1.8

-0.8 -1.2

-0.8 -1.3

NIMs (bp change YoY)


5 0 -5

4 0 -8

4 0 -8

-2.2 -4.2

-1.6 -4.8

-1.6 -4.8

Credit costs (bp)


35 40 60

30 40 60

24 40 60

-3.0 -15.0

-5.0 -15.0

-8.0 -18.0

Overall


-5.0 -18.0

-7.0 -18.0

-10.0 -22.0

DBS

UOB

OCBC

11.1 10.6 9.7

12.0 11.5 10.2

11.4 10.5 9.6


Figure 3: Singapore dollar (S$) loan-deposit ratio (%) 100

4Q07

4Q09

4Q10

4Q12

2Q13

90

140

95 86 81

77

80

82

85 84

79

'00-'04

'05-'09

'10-1H13

132

116 102

100

60

60

60

120

'95-'99

80

69 70

70

Figure 4: Average SP+GP on loans (bp)

55

47 35

40

50

46

39

34

34

51 50

20

40 DBS S$

UOB S$

OCBC S$

Figure 5: P/B relative less ROE relative (%) 60%

OCBC/DBS PB-ROE

11

16

0 DBS

UOB

OCBC

Figure 6: Warranted P/B under stress scenarios(x)

OCBC/UOB PB-ROE

1.6

CS target

1.4

40%

1.2

20%

Normalised

1.3

1.2

1.3

1.1 1.1

Stressed

1.3 1.3

1.2

1.2 1.1

1.0

1.0

0%

Current

1.0

0.8

0.6

-20%

0.4

-40%

-60% Dec/01

0.2

Dec/03

Dec/05

Dec/07

Dec/09

Dec/11

0.0 DBS

UOB

OCBC

Source: Credit Suisse research

Singapore Banks Sector

2

12 September 2013

FY14 earnings risks: Looking for relative safety 1H13 was marked by record profits for Singapore banks driven by better-than-expected strength in non-interest income and loan growth. But the macro-economic environment in their core markets (primarily Singapore+ASEAN+India) has seen a visible deterioration over the past few months, thereby increasing earnings risks. While we are unlikely to see significant impact in 2H13, risks to 2014E earnings have increased.

Three key earnings risks in the near to medium term Loan growth: Singapore banks’ strong overall loan growth has been helped by a renewed strength in regional trade finance, offshore corporate loan bookings and steady mortgage growth in Singapore. However, with further downgrades to regional GDP growth estimates and an imminent slowdown in mortgages, the risks are to the downside in the next few quarters.

A NIM recovery in 2014 becoming less probable, while credit costs are already going up

Net interest margins: Investors now appear more optimistic about a potential NIM recovery. We believe the consensus might be getting too bullish about FY14 NIM prospects given: (1) ASEAN loan growth being bound to slow along with further NIM pressure, (2) continued SGD funding competition and (3) stress in USD funding markets. Credit costs: We have probably seen the bottom for this cycle in terms of credit costs. Singapore banks’ managements now expect a normalisation in credit costs going into 2014. Given the historical low net interest margins, profit sensitivity to higher credit costs is now probably higher than the previous cycles.

Assessing downside risks to 2014 earnings expectations We assess earnings risks under two scenarios: (1) Normalised (mild loan growth slowdown, flat NIMs and credit costs moving towards historical averages) and (2) Stressed (steeper-than-expected growth slowdown, further NIM compression from funding costs and credit costs moving up above historical averages).

OCBC could see the biggest earnings risk even if credit costs just 'normalise'

Loan growth (1–2% earnings impact): With increasing optimism on Greater China and pessimism on ASEAN, DBS is relatively well placed due to lower ASEAN exposure. Net interest margins (2–5%): Stretched SGD (UOB) and USD (DBS and OCBC) balance sheets pose the key risks to margins going into 2014. DBS is relatively well placed. Credit costs (3–18%): OCBC might see the biggest earnings risk if it is not able to repeat its superior performance of the 2005–09 cycle (it has also seen the least conservative provisioning this cycle). DBS and UOB look relatively well placed.

Stress testing valuations: OCBC looks relatively stretched On trailing P/B (1.2x), while Singapore banks are now trading 1 sd below historical average, their premium to the NJA banks sector is close to historical highs. On a relative basis, DBS appears to have sustainably closed some of the ROE discount to peers—but its P/B discount is still close to historical averages. The market-implied ROEs for OCBC appear to be the most optimistic and higher than our near-term expectations, leaving no room for surprise. On P/PPOP multiples (which exclude loan loss provisioning), OCBC trades at a significant premium to peers and much above the historical average levels.

DBS is our top pick—lower earnings risks and potential for valuations to catch-up with better ROEs

Based on our estimates, DBS has the most potential for upside—as P/B multiples play catch-up with the sustainable improvement in ROEs and relatively low downside risks under the normalised or stressed scenarios through 2014E. OCBC’s valuations on the other hand are already rich and potentially have more downside if one of our risk scenarios play out. UOB remains a defensive play in this environment with valuation levels close to warranted levels. DBS remains our top pick in the sector.


3

12 September 2013

Valuation comparison Figure 7: Singapore banks—price performance As of DBSM.SI UOBH.SI OCBC.SI .FTSTI

11-Sep-13 DBS UOB OCBC STI Index

Price CS Tgt S$ 16.31 20.45 10.01 3,108

Upside

S$ 19.00 22.00 10.20

% 16% 8% 2%

Absolute price performance (%) 1D -1.2 0.4 -0.3 -0.5

1W 2.2 2.1 1.7 3.1

1M -5.2 -6.0 -6.8 -3.8

3M 1.6 1.6 -0.9 -2.0

6M 12M YTD 5.5 12.0 9.9 3.2 7.0 3.2 -3.3 7.1 2.9 -5.6 3.0 -1.9

2012 28.8 29.7 24.3 19.7

2011 -19.6 -16.1 -20.7 -17.0

2010 -7.0 -7.6 8.6 10.1

2009 82.9 52.5 82.4 64.5

2008 -52.8 -35.1 -39.8 -49.2

2007 -8.4 2.6 7.7 18.7

Source: Bloomberg, Credit Suisse research

Figure 8: Singapore banks—valuation comparison 11-Sep-13 2008 2009 2010 Cash core profit (S$ mn) DBS 2,036 2,034 2,620 UOB 1,889 1,806 2,368 OCBC 1,493 1,744 2,218 Reported FDEPS (S$) DBS 1.02 0.87 0.67 UOB 1.24 1.19 1.70 OCBC 0.55 0.58 0.65 Cash core FDEPS (S$) DBS 1.09 0.88 1.09 UOB 1.25 1.20 1.55 OCBC 0.48 0.54 0.67 P/E on reported FDEPS (x) DBS 16.0 18.8 24.4 UOB 16.5 17.2 12.0 OCBC 18.3 17.1 15.4 Book value per share (S$) DBS 11.1 11.0 11.4 UOB 8.9 11.2 12.5 OCBC 4.5 5.2 5.6 Cash core ROA (%) DBS 0.83 0.79 0.97 UOB 1.06 0.98 1.19 OCBC 0.84 0.93 1.05 Cash core RONTA (%) DBS 14.3 12.3 12.8 UOB 17.6 16.6 17.1 OCBC 13.6 14.4 15.7 Dividend per share (S$) DBS 0.55 0.56 0.56 UOB 0.60 0.60 0.70 OCBC 0.28 0.28 0.30 Pre-provision optg profit (S$ mn) DBS 3,049 3,732 3,728 UOB 2,865 3,209 3,118 OCBC 2,361 2,760 2,858 Mkt cap / PPOP (x) DBS 13.1 10.7 10.7 UOB 11.2 10.0 10.3 OCBC 14.6 12.5 12.1

2011

2012

2013E

2014E

3,005 2,231 2,250

3,329 2,705 2,775

3,478 2,696 2,640

3,861 3,019 2,867

1.24 1.43 0.65

1.55 1.71 1.12

1.40 1.70 0.74

1.55 1.90 0.81

1.24 1.43 0.66

1.36 1.72 0.80

1.40 1.71 0.76

1.55 1.90 0.83

13.2 14.3 15.4

10.5 11.9 8.9

11.6 12.0 13.4

10.5 10.8 12.4

12.2 13.2 6.0

12.9 14.6 6.7

13.7 15.3 7.0

14.6 16.4 7.4

0.96 0.99 0.89

0.96 1.10 0.97

0.94 1.03 0.86

0.95 1.07 0.86

13.3 14.1 14.3

13.2 15.3 15.5

12.5 13.9 13.5

12.8 14.4 13.7

0.56 0.60 0.30

0.56 0.70 0.33

0.56 0.70 0.33

0.60 0.75 0.33

3,855 3,045 3,067

3,982 3,305 3,834

4,870 3,711 3,556

5,254 4,042 4,038

10.4 10.6 11.2

10.0 9.7 9.0

8.2 8.7 9.7

7.6 8.0 8.5

2008 2009 Cash core profit growth (%) DBS -17.6 -0.1 UOB -9.2 -4.4 OCBC -20.8 16.8 Reported FDEPS growth (%) DBS -15.8 -15.2 UOB -8.8 -4.1 OCBC -16.7 6.5 Cash core FDEPS growth (%) DBS -17.8 -19.6 UOB -8.8 -4.2 OCBC -21.5 13.6 P/E on cash core EPS (x) DBS 15.0 18.6 UOB 16.4 17.1 OCBC 20.9 18.4 P/B (x) DBS 1.47 1.48 UOB 2.29 1.83 OCBC 2.22 1.91 Cash core ROE (%) DBS 10.1 9.1 UOB 12.6 11.9 OCBC 10.4 11.3 P/NTA (x) DBS 2.19 2.02 UOB 3.35 2.44 OCBC 2.93 2.39 Dividend yield (%) DBS 3.4 3.4 UOB 2.9 2.9 OCBC 2.8 2.8 Pre-prov.op.profit growth (%) DBS -1.3 22.4 UOB 9.1 12.0 OCBC 2.6 16.9 Mkt cap / deposits (%) DBS 23.5 21.8 UOB 27.2 26.5 OCBC 36.6 34.2

2010

2011

2012

2013E

2014E

28.8 31.1 27.2

14.7 -5.8 1.4

10.8 21.2 23.3

4.5 -0.3 -4.8

11.0 12.0 8.6

-22.8 42.5 11.5

84.9 -16.1 -0.3

25.0 20.2 72.5

-9.2 -0.6 -33.5

10.1 11.3 8.8

24.8 29.6 22.8

13.1 -7.8 -1.5

10.1 20.0 21.7

3.1 -0.6 -4.8

10.1 11.3 8.6

14.9 13.2 15.0

13.2 14.3 15.2

12.0 11.9 12.5

11.6 12.0 13.1

10.5 10.8 12.1

1.43 1.63 1.78

1.34 1.55 1.66

1.26 1.40 1.50

1.19 1.34 1.44

1.12 1.25 1.34

10.2 13.1 12.4

10.9 11.1 11.4

11.1 12.4 12.7

10.7 11.4 11.3

11.1 12.0 11.6

1.82 2.09 2.27

1.68 1.94 2.06

1.51 1.72 1.80

1.41 1.61 1.71

1.30 1.49 1.57

3.4 3.4 3.0

3.4 2.9 3.0

3.4 3.4 3.3

3.4 3.4 3.3

3.7 3.7 3.3

-0.1 -2.8 3.6

3.4 -2.3 7.3

3.3 8.5 25.0

22.3 12.3 -7.2

7.9 8.9 13.5

20.6 22.6 27.9

17.7 19.0 22.3

16.4 17.7 20.9

14.4 16.1 18.8

13.1 14.6 17.2



4

12 September 2013

Operational comparison Figure 9: Singapore banks—operational comparison 2008 2009 2010 Net int income growth (%) DBS 4.7 3.6 -3.1 UOB 20.0 2.7 -3.9 OCBC 24.0 1.5 4.3 Fee income growth (%) DBS -12.9 9.4 0.2 UOB -14.3 -10.9 19.1 OCBC -4.2 -5.7 34.7 Non int income growth (%) DBS -15.1 38.5 24.1 UOB -19.5 20.2 14.6 OCBC -17.6 20.9 25.1 Trading income (S$ mn) DBS 23 433 895 UOB -51 331 244 OCBC 43 344 402 Optg expense growth (%) DBS -0.3 -0.2 12.3 UOB 1.6 1.2 8.8 OCBC 10.4 -3.1 25.5 PPOP growth (%) DBS -1.3 22.4 -0.1 UOB 9.1 12.0 -2.8 OCBC 2.6 16.9 3.6 Cash core profit growth (%) DBS -17.6 -0.1 28.8 UOB -9.2 -4.4 31.1 OCBC -20.8 16.8 27.2 Loan growth (%) DBS 16.9 3.9 16.0 UOB 7.9 -0.3 13.1 OCBC 11.8 1.2 29.3 Core RONTA (%) DBS 14.3 12.3 12.8 UOB 17.6 16.6 17.1 OCBC 13.6 14.4 15.7 Loan deposit ratio (x) DBS 74 71 79 UOB 84 82 79 OCBC 85 80 85 NPLs / loans (%) DBS 1.5 2.9 1.9 UOB 2.0 2.2 1.9 OCBC 1.5 1.7 0.9

2011

2012 2013E 2014E

11.7 4.1 15.7

9.5 6.5 9.9

5.6 4.0 2.4

16.3 11.7 8.8

10.4 13.4 15.7

2.4 14.4 5.4

20.0 13.0 9.0

7.0 12.0 10.0

-0.1 -1.5 -3.6

-0.9 17.5 33.3

38.8 17.5 -8.2

-7.8 2.2 13.6

680 190 217

689 231 515

1,244 404 346

880 250 500

12.9 8.5 7.8

9.4 12.2 10.9

8.5 4.6 5.2

7.1 7.0 7.2

3.4 -2.3 7.3

3.3 8.5 25.0

22.3 12.3 -7.2

7.9 8.9 13.5

14.7 -5.8 1.4

10.8 21.2 23.3

4.5 -0.3 -4.8

11.0 12.0 8.6

27.9 25.0 26.9

8.1 8.3 6.6

16.0 14.0 12.0

10.0 8.0 9.0

13.3 14.1 14.3

13.2 15.3 15.5

12.5 13.9 13.5

12.8 14.4 13.7

86 83 86

87 84 86

88 87 87

88 86 87

1.3 1.4 0.9

1.2 1.5 0.8

1.3 1.6 0.9

1.5 1.8 1.1

2008 2009 2010 NIM (%) DBS 2.04 2.02 1.84 UOB 2.27 2.36 2.09 OCBC 2.27 2.23 1.94 Fee income / total revenue (%) DBS 23 22 21 UOB 22 18 22 OCBC 18 16 19 Non int income / total revenue (%) DBS 24 30 35 UOB 27 30 34 OCBC 34 38 42 Revenue growth (%) DBS -0.8 12.0 5.0 UOB 5.9 7.5 1.7 OCBC 5.9 8.1 12.2 Cost-income (%) DBS 46 41 44 UOB 42 39 42 OCBC 44 39 44 PPOP ROE (%) DBS 16.4 19.8 18.5 UOB 18.5 21.4 20.3 OCBC 18.3 20.9 20.5 Core ROA (%) DBS 0.83 0.79 0.97 UOB 1.06 0.98 1.19 OCBC 0.84 0.93 1.05 Core ROE (%) DBS 10.1 9.1 10.2 UOB 12.6 11.9 13.1 OCBC 10.4 11.3 12.4 Cash core RORWA (%) DBS 1.11 1.13 1.46 UOB 1.58 1.68 2.28 OCBC 1.53 1.78 2.16 P&L provisioning (bp of loans) DBS 66 117 63 UOB 82 110 44 OCBC 58 52 14 Loan loss coverage (%) DBS 114 82 100 UOB 111 105 119 OCBC 113 100 119

2011

2012 2013E 2014E

1.77 1.92 1.81

1.72 1.87 1.72

1.67 1.78 1.69

1.73 1.81 1.77

22 24 21

21 25 18

22 26 20

21 27 20

33 33 38

30 35 43

36 38 40

31 36 41

7.6 2.2 7.5

6.1 10.2 18.8

15.7 8.8 -2.1

7.5 8.1 10.7

46 45 44

48 45 41

45 44 44

44 43 43

18.2 19.0 20.8

17.9 19.8 24.6

20.8 21.2 21.6

21.4 22.2 23.3

0.96 0.99 0.89

0.96 1.10 0.97

0.94 1.03 0.86

0.95 1.07 0.86

10.9 11.1 11.4

11.1 12.4 12.7

10.7 11.4 11.3

11.1 12.0 11.6

1.52 1.86 1.93

1.55 2.03 2.15

1.57 1.98 1.99

1.64 2.10 2.04

41 40 18

20 32 19

39 30 18

35 30 24

126 126 107

142 124 142

135 111 118

121 99 100

Source: Company data, Credit Suisse estimates


5

12 September 2013

Three key earnings risks in the near to medium term 1H13 was marked by record profits for Singapore banks driven by better-than-expected strength in non-interest income and loan growth across segments. But the macroeconomic environment in the core markets (mainly Singapore+ASEAN+India) for Singapore banks has seen a visible deterioration over the past few months, thereby increasing earnings risks in the near to medium term. While we are unlikely to see significant impact in 2H13, the risks to 2014 earnings expectations have increased. In this section, we look at the three key risks to Singapore banks’ earnings through 2014E.

While we are unlikely to see significant impact in 2H13, there are material risks to 2014 earnings expectations

Loan growth: ASEAN slowdown and Singapore mortgages key risks to growth Singapore banks' overall loan growth has been extremely strong over the past 4–6 quarters given the macro backdrop, helped by a renewed strength in regional trade finance loans and offshore corporate loan bookings in Singapore. But with further downgrades to regional GDP growth estimates and an imminent slowdown in Singapore mortgages, the risks are to the downside in the next few quarters. ASEAN loan growth slowdown imminent Overseas loans have been a major contributor to Singapore banks' loan growth over the past 1–2 years. Relatively, OCBC has seen the biggest contribution from overseas loan growth (49% contribution to growth over the past year) and UOB has seen the least (only 25% contribution). The bulk of the overseas growth has come either from ASEAN (UOB and OCBC) or Greater China (DBS). Figure 10: Region-wise loan growth snapshot As of June 2013 Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans

DBS 114.6 37.8

41.6 44.4 238.4

As of June 2013 (%) Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans

S$ bn UOB 113.7 24.4 9.2 5.9 10.0 9.7 172.9

OCBC 82.7 24.7 12.0 20.2 19.2 158.9

Composition DBS UOB OCBC 48% 66% 52% 16% 14% 16% 5% 3% 8% 17% 6% 13% 19% 6% 12% 100% 100% 100%

DBS 3.8 2.8

12.6 3.5 5.0

QoQ (%) UOB 3.4 2.2 -0.6 3.3 11.1 2.2 3.3

OCBC 6.0 3.5 9.1 18.9 3.5 7.0

Growth CAGR (%) DBS 17.2 1.1

47.6 17.9 17.9

2Y UOB 15.2 18.7 14.3 9.3 17.1 3.5 14.8

OCBC 12.3

DBS 17.5 0.7

14.5 23.8 17.4 16.3 14.5

53.8 13.9 16.9

3Y UOB 18.0 21.2 12.9 15.3 27.6 4.8 17.6

OCBC 15.9

DBS 62 -6.0

14.3 24.2 27.7 24.9 18.5

36 8 100

1Y UOB 75 10 6 1 4 5 100

DBS 12.9 -0.9

OCBC 51 16 9 15 10 100

35.7 1.9 11.5

YTD (%) UOB 12.5 4.1 7.5 5.1 8.5 21.9 10.9

OCBC 10.0

DBS 19.3 -4.6

6.9 12.4 16.3 9.1 10.3

% contribution to growth 2Y DBS UOB OCBC 47 67 45 1 17 16 5 2 11 34 6 15 19 2 13 100 100 100

35.0 5.7 14.4

DBS 49 1

34 16 100

YoY (%) UOB 17.9 10.0 16.6 2.2 10.6 14.2 15.4 3Y UOB 67 16 4 3 8 2 100

OCBC 14.3 15.2 17.0 18.2 11.8 14.8

OCBC 47 13 9 17 15 100

Source: Company data, Credit Suisse research

But over the past few months, the sentiment towards ASEAN has turned for the worse and downside risks to near-term GDP growth appear to have increased according to the CS economists: Malaysia: Lower GDP, higher inflation—The government's decision to place greater emphasis on the budget position means that fiscal policy will become less accommodative—with higher fuel prices eroding consumer spending power and postponement of some infrastructure projects capping the overall investment growth. CS Economics team recently cut 2013 GDP growth forecast to 4.4% from 5% earlier and 2014


Better fiscal/current a/c positions at the cost of nearterm growth

6

12 September 2013

estimate to 5% from 5.2% earlier—both these numbers are below the consensus expectations. The fuel price hike could immediately add nearly 1% to the headline inflation with some potential second round impact via the increase in transport costs affecting items such as food. We still believe inflation will remain manageable—this hike is well-timed in the sense that it comes when inflation pressure is very low. With the government tightening up the fiscal stance (with negative implications for GDP growth), and inflation pressures likely to remain manageable, even after the fuel price hikes, we doubt the central bank will be in a rush to raise the policy rate this year. This view is strengthened by the fact that it has already issued a series of macro prudential measures to tackle the household leverage issue. Indonesia: Double Trouble—Just as it looked as though Indonesia’s trade deficit may finally be stabilising, August’s data provided a nasty and badly timed surprise. While merchandise export values contracted 6.1% YoY, only marginally worse than market expectations, imports were 10% stronger than consensus at +6.5%, sending the deficit to US$2,310 mn. The latter is comfortably the highest on record. The inflation headline rate rose for a third consecutive month—reaching 8.8% from 8.6%. Having raised rates by 50 bp already, incremental data releases do not reassure the central bank while unsettling the markets once again. In our view, BI still has plenty of work to do to calm things down, which will almost certainly involve adding to the 125 bp of rate hikes delivered to date. We have another 50 bp in the profile. A combination of higher interest rates, softening real income growth and knock-on effects from the investment slowdown is likely to see consumer spending growth soften in the not-too-distant future.

A combination of macro pressures to soften consumer spending growth in the near term

Thailand: Expect further cuts to growth expectations—With the recent set of releases marking a soft start to the anticipated growth recovery in the second half of the year, we recently revised down our 2013 GDP expectation to 2.7% from 4% earlier. As a result of the weaker growth momentum going into 2014, we have also shaved our 2014 GDP growth forecast to 4.5% from 5%. It is important to stress that the main story has not changed significantly—GDP growth being dragged down by soft consumer spending (especially by rural households), delays in investment, while exports will provide a boost to growth momentum in the second half. We expect the consensus as well as the central bank's 2013 GDP growth expectation (4.2%) to be revised down significantly. We believe the BoT has room to cut rate by 25 bp at its next meeting given the downside risk, official growth estimates, benign inflation outlook, and softening credit growth.

We believe the BoT has room to cut rate by 25 bp at its next meeting in October

Figure 11: ASEAN—quarterly GDP growth forecasts (YoY%) 20 SG

MY

TH

ID

15

10

5

0

-5

-10 1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13F

4Q13F

1Q14F

2Q14F

3Q14F

4Q14F

Source: Company data, Credit Suisse estimates

Overall, the economic growth momentum in 2H13 has been below expectations. Coupled with inflation and currency risks, this leaves the central banks with little room for more accommodative action—leaving little room for any positive surprises in 2014.


7

12 September 2013

Singapore mortgage loan growth could slow in 2014 Despite several rounds of property market cooling measures employed by the Singapore government, the growth in outstanding overall mortgage loan continues to be steady for Singapore banks led by two drivers: (1) The growth in outstanding loans is being driven by drawdown on mortgage loans booked earlier (driven by record primary market sales), and (2) Some of the slowdown in Singapore mortgages is being compensated by a more aggressive approach to mortgages in regional markets (except DBS). Figure 12: Industry-wise loan growth snapshot As of June 2013 Cons. + hsg loans Consumer Housing Business loans Manufacturing Bldg / constn Gen commerce Trans/ commn Fin instns Others Total loans

DBS 64.2 17.0 47.2 174.2 32.6 40.2 48.2 19.8 10.0 23.4 238.4

Mar-13 (S$ bn) UOB OCBC 73.1 56.3 24.2 15.9 49.0 40.5 99.8 102.6 16.1 9.3 21.5 23.7 21.2 23.0 7.6 10.9 26.2 22.4 7.3 13.3 172.9 158.9

As of June 2013 (%)

DBS 27% 7% 20% 73% 14% 17% 20% 8% 4% 10% 100%

Composition UOB OCBC 42% 35% 14% 10% 28% 25% 58% 65% 9% 6% 12% 15% 12% 14% 4% 7% 15% 14% 4% 8% 100% 100%

DBS 3.6 9.7 1.5 5.6 3.7 8.3 4.5 13.0 -4.4 4.5 5.0

QoQ (%) UOB 2.6 4.0 1.9 3.9 0.2 2.5 5.0 8.0 8.1 -4.9 3.3

DBS 23 9 14 77 17 18 37 4 -2 4 100

1Y UOB 43 17 26 57 20 11 13 0 13 1 100

Growth CAGR (%) DBS 11.2 16.5 9.5 20.7 20.3 27.9 43.1 11.5 -21.3 17.7 17.9

Cons. + hsg loans Consumer Housing Business loans Manufacturing Bldg / constn Gen commerce Trans/ commn Fin instns Others Total loans

2Y UOB 17.6 22.0 15.6 12.8 29.6 22.7 9.7 5.7 8.4 -3.7 14.8

OCBC 17.0 13.9 18.2 13.2 11.0 14.7 15.1 19.6 10.6 9.2 14.5

DBS 10.5 17.5 8.4 19.7 20.9 25.6 48.3 14.2 -21.0 17.1 16.9

3Y UOB 18.1 20.2 17.1 17.2 24.1 21.9 14.5 8.1 21.6 1.5 17.6

OCBC 17.6 16.1 18.2 19.0 12.9 14.1 29.9 22.0 27.3 6.3 18.5

OCBC 8.1 11.1 7.0 11.5 13.4 5.7 31.5 19.4 -0.2 8.1 10.3

DBS 11.9 18.8 9.6 15.3 18.3 15.8 29.4 6.1 -6.0 5.1 14.4

YoY (%) UOB 15.6 19.2 13.9 15.3 39.6 13.3 16.8 -0.4 12.8 2.2 15.4

OCBC 15.9 16.3 15.7 14.3 10.8 11.7 25.7 18.5 12.5 4.3 14.8

% contribution to growth 2Y DBS UOB OCBC 18 49 40 7 19 10 12 30 31 82 51 60 15 16 5 23 17 15 37 9 15 6 2 9 -9 9 11 10 -1 6 100 100 100

DBS 19 7 11 81 16 22 37 7 -11 10 100

3Y UOB 43 15 28 57 12 14 11 2 17 0 100

OCBC 34 9 25 66 4 12 20 8 18 4 100

OCBC 3.4 5.6 2.5 9.1 7.5 4.3 22.4 8.4 4.7 7.0 7.0

OCBC 38 11 27 62 4 12 23 8 12 3 100

DBS 6.0 13.5 3.6 13.6 20.4 11.1 26.2 11.7 -10.6 2.2 11.5

YTD (%) UOB 6.7 8.0 6.1 14.2 36.0 10.4 13.6 10.2 10.4 6.4 10.9


But as the primary and secondary market transaction volumes in Singapore continue to slow, the pace of mortgage loan growth is bound to slow in 2014. The charts below illustrate the lag effect between property transaction volumes and loan growth. Figure 13: Residential primary sales ('000) versus system

Figure 14: Primary sales ('000) versus total property

mortgage loan growth (YoY%)

related (mortgage + construction) loan growth (YoY%)

7.0

Primary sales ('000)

25

Mortgage loans YoY%

7.0

Primary sales ('000)

30

Total Property related loans YoY%

6.0

6.0

25

20 5.0

5.0 15

4.0

20

4.0 15

3.0

10

3.0 10

2.0

2.0 5

5

1.0

1.0 0.0

0 2Q97

2Q99

2Q01

2Q03

2Q05

2Q07



2Q09

2Q11

2Q13

0.0

0

2Q97

2Q99

2Q01

2Q03

2Q05

2Q07

2Q09

2Q11

2Q13


8

12 September 2013

USD / trade finance growth could remain volatile USD loan growth has been a key factor in the better-than-expected loan growth for Singapore banks, primarily driven by the strength in trade finance loans. DBS has seen the biggest growth contribution from trade finance loans and UOB the least. But as witnessed during mid-2012, the short-term trade finance loan growth tends to be volatile and more correlated to the trade flows. As a result, it will not be surprising to see a sudden slowdown or a shrinkage in the trade finance loan portfolio if the economic growth surprises on the downside. Figure 15: Currency-wise loan growth snapshot As of June 2013 DBS 97.8 80.1 0.0 28.8

SGD USD MYR HKD THB Others Total

31.7 238.4

As of June 2013 (%)

S$ bn UOB 97.8 22.5 22.8

OCBC 73.3 40.1 19.8

4.8 24.9 172.9

25.6 158.9

Composition DBS UOB OCBC 41% 57% 46% 34% 13% 25% 0% 13% 12% 12% 3% 13% 14% 16% 100% 100% 100%

DBS 2.8 8.3 0.0 -1.3 10.2 5.0

QoQ (%) UOB 1.8 11.4 2.1

OCBC 3.1 15.2 3.9

DBS 8.0 19.3 0.0 -2.1

3.7 6.8 3.3

9.3 7.0

18.5 11.5

Growth CAGR (%) DBS 16.3 27.5 0.0 -1.0

SGD USD MYR HKD THB Others Total

24.5 17.9

2Y UOB 15.6 12.9 18.9

OCBC 12.0 17.9 13.5

DBS 17.1 30.1 0.0 -4.5

-14.9 9.2 14.8

17.6 14.5

18.8 16.9

3Y UOB 17.1 17.3 20.9

OCBC 14.7 32.5 10.9

DBS 45 48 0 -5

-7.8 21.1 17.6

19.3 18.5

11 100

1Y UOB 65 14 10

OCBC 39 31 12

-12 5 100

17 100

YTD (%) UOB 11.5 24.0 4.5

OCBC 4.6 26.6 7.7

DBS 16.1 22.1 0.0 -5.1

-40.2 5.5 10.9

7.6 10.3

12.1 14.4

% contribution to growth 2Y DBS UOB OCBC 38 59 40 46 12 30 0 16 12 -1 -4 17 6 19 100 100 100

YoY (%) UOB 18.0 17.2 11.7

OCBC 12.4 19.2 14.8

-35.8 7.9 15.4

15.4 14.8

3Y UOB 55 13 15

OCBC 39 36 8

-2 11 100

17 100

DBS 41 49 0 -5 14 100


Given the rapid pace of growth in the past few years, trade finance and USD loans have significantly increased their share of the loan book. As a result, volatility in USD/trade finance loan growth could now more impact overall loan growth. While DBS has almost doubled the share of USD and trade finance loans since 2006, UOB has surprisingly brought down the share of USD and trade finance loans marginally since 2006. As a result, while DBS remains the most prone to volatility in trade finance loan growth, UOB’s loan growth could be relatively less volatile. Figure 16: General commerce as % of total loans 25

2006

2008

Figure 17: US$ denominated as % of total loans

2011

2Q13

2006

20

2008

2011

2Q13

34

35 31

20

30

17 15

15

15

40

13 12 12 10 10

25 20

10

10

14

9

26

25

22 18

16 16

15

14 13

13 13

10

5

5 0

0 DBS

UOB



OCBC

DBS

UOB

OCBC


9

12 September 2013

Margins: False bottom? Much of the earnings optimism around Singapore banks post the 2Q13 results has been driven by the guidance from banks that NIMs are now probably closer to their cyclical bottom and could probably start improving in FY14. This view has been further supported by the recent spikes in longer-term government bond yields, which in theory should help banks’ NIMs improve going forward. But looking at the underlying drivers in various markets, we believe the consensus might be getting too bullish about FY14 NIM prospects. ASEAN NIMs to remain under pressure near term The primary driver behind an improvement in Group NIMs could be a much better loan growth profile in regional markets relative to Singapore (which is the lowest NIM market for Singapore banks). But as discussed earlier, given the increasing macro risks in the region, regional loan growth is unlikely to be much superior (partly market driven, but mostly due to banks' conservative approach) in the next few quarters. Moreover, the NIM pressure in the regional markets could potentially experience further pressure in the near term. Malaysia: Singapore banks are guiding that the pricing environment seems to be improving but funding pressure is still prominent. According to the CS Malaysian banks’ analyst Danny Goh, most of the Malaysian local banks expect less NIM compression in 2H13 as funding cost pressure has eased and loan pricing competition has not intensified further. Moreover, banks seem more focused on preserving credit quality and NIMs. With market leaders adopting risk-based pricing, we expect more rational pricing among industry players. Overall, while NIM compression is expected to subside, we are unlikely to see an expansion anytime soon.

Indonesia and Thailand NIMs could continue to compress near term

Indonesia: NIM pressure expected to continue with a squeeze on both asset pricing and funding costs. Singapore banks, with their already high LDRs, are most likely to see further NIM pressure in the next few quarters. Higher policy rates might provide some cushion but tighter funding competition might erode the advantage. Thailand: UOB expects some further NIM pressure in the near term, driven by tighter funding competition and its targeted higher pace of loan growth. Policy rate cuts might prove to be a further dampener on the prospects for a NIM recovery. Figure 18: Malaysia geographical NIMs (%)

Figure 19: Indonesia geographical NIMs (%) 7.0

3.3 UOB

OCBC

3.1

UOB

OCBC

6.5

2.9

6.0

2.7 5.5

2.5

5.0

2.3

2.1

4.5

1.9 4.0

1.7

3.5

1.5 2Q08

2Q09

2Q10

2Q11



2Q12

2Q13

2Q08

2Q09

2Q10

2Q11

2Q12

2Q13


10

12 September 2013

SGD liquidity concerns becoming more critical to NIM expectations Given the lowering growth expectations for Singapore banks' regional operations, the trajectory of Singapore geographical NIMs might become more critical to determine the NIM trajectory over the next few quarters. The NIM pressure witnessed in Singapore (driven by mortgage repricing, trade finance and tighter corporate loan pricing) has been partly cushioned by the increasing Singapore dollar LDRs. But with Singapore dollar LDRs (especially UOB and OCBC) already at above optimal levels, we are unlikely to see further support from stretching LDRs. This might mean UOB and OCBC might have to compete more aggressively for SGD deposits.

UOB and OCBC might have to compete more aggressively for SGD deposits

Figure 20: UOB Singapore NIMs (%)

Figure 21: Singapore dollar (S$) loan-deposit ratio (%)

2.2

100

2.0

90

4Q07

4Q09

4Q10

4Q12

2Q13

95 86 81

1.8

80

1.6

70

1.4

60

77

82

85 84

79

69 70 60 55

51 1.2

50

1.0

2Q08

2Q09

2Q10

2Q11

2Q12

2Q13


40 DBS S$

UOB S$

OCBC S$


Trade finance growth and USD liquidity remains a minor risk While the aggressive growth in trade finance loans has been a major contributor to Singapore banks' NIM compression, the relative stability of Singapore banks NIMs in their trade finance exposure has been helped by a relatively stable USD short-term funding market with Singapore banks having an advantage in both short-term funding rates and SGD-USD swap rates. Any stress in the USD funding markets or even more normalisation could be negative for Singapore bank NIMs in their trade finance book. Figure 22: US dollar (US$) loan-deposit ratio (%) 180

4Q07

4Q09

4Q10

Figure 23: Trade finance as % of total loans

4Q12

2Q13

25

2006

161 160

2011

2Q13

20 20

146

17

140

127

120

116

112

101 100

2008

90

90

80

99

95 80 83

89

101

15

15

15

14

13 12 12 10 10

10

10

9

82

5 60

0

40 DBS US$

UOB US$



OCBC US$

DBS

UOB

OCBC


11

12 September 2013

Credit costs: Normalisation or shock? After witnessing a continuous improvement in the overall asset quality environment since 2010 with historical low credit costs (both primarily helped by low interest rates), we have probably seen the bottom for this cycle in terms of credit costs. Singapore banks’ managements now expect a normalisation in credit costs going into 2014. Given the historic low net interest margins, profit sensitivity to higher credit costs is now probably higher than previous cycles. How different is this cycle? To determine the potential average credit costs through this cycle, we need to assess the different drivers through this cycle—mainly interest rates, credit growth and relative provisioning levels. Rates: Historic low interest levels are probably the most important differentiating factor in this cycle. In almost all previous instances of a turn in asset quality cycle, interest rates were at a much elevated level. This has two implications when determining the potential spike in credit when the cycle turns: (1) Borrowers are at a much better position in a low rate environment to service their loans (through higher interest coverage ratios), (2) But the net interest margins in a low rate environment are potentially very low and have much lower cushion to absorb a spike in credit costs.

Historical low rates should help cushion a big spike in credit costs in the near term

Figure 24: Three-month SIBOR and LIBOR (%) 8.0 SIBOR

LIBOR

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

Source: Bloomberg, Credit Suisse research

Credit growth: The pace of credit through the cycle is a good indicator of the level of risk built up in the system. Through cycle, since circa 2010, the pace of credit growth for Singapore banks have reached unprecedented levels, partly driven by property related loan growth and aggressive opportunistic growth into the USD trade finance segment.

The current cycle has been characterised by the rapid rise in offshore and USD exposure

An interesting through different cycles is the increasing pace of credit growth, with the current cycle seeing a much faster pace of growth. This trend is partly driven by the expansion of Singapore banks into regional markets. While during 2004–09 Singapore banks started expanding aggressively into regional ASEAN markets, the current cycle (starting 2010) has been characterised by the rapid rise in offshore and USD exposure. The Singapore banking system’s leverage (as % of GDP) has also reached unprecedented levels during this cycle.


12

12 September 2013

Figure 25: Loan growth CAGR (%) through cycles

Figure 26: Singapore system loans / GDP (%)

25

300

'95-'99

'01-'04

'05-'09

'09-1H13

DBU loans / GDP

20.7 20

DBU+ACU loans / GDP

250

18.0 16.4

15

200

13.3 9.9

9.5

10

9.5

150

4.7

5

100

3.2

1.9

0.8

0.2 0

DBS

UOB

50

OCBC


4Q00

4Q02

4Q04

4Q06

4Q08

4Q10

4Q12

Source: CEIC, Credit Suisse research

Credit costs: The amount of discretionary loan loss provisions set aside by banks through the early stages of the cycle could help us gauge the relative risk of a credit cost shock when the cycle turns. On a relative basis, DBS and UOB appear to have been more proactive with a higher level of discretionary provisioning through this cycle. While this does not necessarily result in lower potential credit costs later in the cycle, it provides a cushion during the normalisation process. Figure 27: Average SP+GP on loans (bp) 140 120

'95-'99

'00-'04

'05-'09

'10-1H13

Figure 28: Average total credit costs (bp) 140

132

116

120

'95-'99

'00-'04

100

80

80

'10-1H13

132

117

102 100

'05-'09

96

63 60 40

47 35

39

46 34

60

50 34

49

55

54 44

36

40

31

24 20

11

0

16

20

13

0 DBS

UOB


OCBC

DBS

UOB

OCBC


Overall, normalisation has started but a shock unlikely in the near term While the pace and nature of overseas loan growth through this cycle suggests that a normalisation in credit costs is imminent, we do not expect a credit cost shock in the near term due to two key reasons: (1) Interest rates are expected to remain at record low levels in most regional markets, providing a critical cushion in terms of better coverage levels for borrowers (2) Majority of the incremental credit growth through this cycle has been driven by collateralised lending, which in theory should see lower through cycle credit costs


13

12 September 2013

Assessing downside risks to 2014 earnings expectations In this section, we assess the downside risks to Singapore banks' earnings expectations for 2014E under two scenarios: Normalisation: Under this scenario, growth in Singapore and regional markets is mildly slower than our base case expectations. While the underlying credit costs start to normalise, there are no macro events (interest rate spikes, recession, currency market stress etc.) to warrant a sudden spike in credit costs. While loan growth sees a mild slowdown, net interest margins remain flat (versus base expectation of a mild recovery). Stressed: Under this scenario, growth in Singapore and regional markets witness a sudden and sharper-than-expected slowdown. Credit costs could potentially see a spike, also driven by other macro shocks. Loan growth slows down significantly and net interest margins see further compression (led by tighter liquidity and end of cheap USD funding).

Loan growth: A potential slowdown, but unlikely to see a big divergence Downside risks to 2014 loan growth expectations could mainly arise from slower overseas loan growth, partly driven by an overall macro slowdown and partly by a more conservative approach to overseas growth from Singapore banks. Figure 29: Region-wise loan growth snapshot As of June 2013 Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans

DBS 114.6 37.8

41.6 44.4 238.4

As of June 2013 (%) Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Total loans

S$ bn UOB 113.7 24.4 9.2 5.9 10.0 9.7 172.9

OCBC 82.7 24.7 12.0 20.2 19.2 158.9

Composition DBS UOB OCBC 48% 66% 52% 16% 14% 16% 5% 3% 8% 17% 6% 13% 19% 6% 12% 100% 100% 100%

DBS 3.8 2.8

12.6 3.5 5.0

QoQ (%) UOB 3.4 2.2 -0.6 3.3 11.1 2.2 3.3

OCBC 6.0 3.5 9.1 18.9 3.5 7.0

Growth CAGR (%) DBS 17.2 1.1

47.6 17.9 17.9

2Y UOB 15.2 18.7 14.3 9.3 17.1 3.5 14.8

OCBC 12.3

DBS 17.5 0.7

14.5 23.8 17.4 16.3 14.5

53.8 13.9 16.9

3Y UOB 18.0 21.2 12.9 15.3 27.6 4.8 17.6

OCBC 15.9

DBS 62 -6.0

14.3 24.2 27.7 24.9 18.5

36 8 100

1Y UOB 75 10 6 1 4 5 100

DBS 12.9 -0.9

OCBC 51 16 9 15 10 100

35.7 1.9 11.5

YTD (%) UOB 12.5 4.1 7.5 5.1 8.5 21.9 10.9

OCBC 10.0

DBS 19.3 -4.6

6.9 12.4 16.3 9.1 10.3

% contribution to growth 2Y DBS UOB OCBC 47 67 45 1 17 16 5 2 11 34 6 15 19 2 13 100 100 100

35.0 5.7 14.4

DBS 49 1

34 16 100

YoY (%) UOB 17.9 10.0 16.6 2.2 10.6 14.2 15.4 3Y UOB 67 16 4 3 8 2 100

OCBC 14.3 15.2 17.0 18.2 11.8 14.8

OCBC 47 13 9 17 15 100


In the table below we lay out our bottom-up loan growth assumptions for Singapore banks under various scenarios. DBS: The key source of risk to loan growth is a significant slowdown in offshore loan demand, especially in Greater China. But the probability of a significant slowdown has been decreasing given the increasingly positive macro news flow from Greater China.

Every 5% change in loan growth could have only a 1–2% earnings impact

UOB: The probability of a slowdown in ASEAN regional loan growth is now higher with increasing macro risks in the region. While the overall market growth might slow down, UOB in typical fashion could turn more conservative towards growth resulting in a slower-than-market growth. OCBC: OCBC has been the biggest beneficiary of overseas loan growth this cycle and as a result is the most prone to a slowdown in overseas loan growth.


14

12 September 2013

Overall, the key drivers of a slowdown in loan growth could be overseas markets—ASEAN (UOB, OCBC), Greater China (OCBC) and India (DBS, if management decides to shrink loan book significantly). But the probability of a Greater China-driven slowdown appears increasingly unlikely—lowering the downside risks for DBS significantly. As a result, UOB and OCBC are probably at a higher risk of an ASEAN-driven slowdown. Figure 30: Regional loan growth assumptions Base case (2014E) (YoY%) Singapore Hong Kong Malaysia Thailand Indonesia Greater China Other Group loans

Normalised

UOB and OCBC are probably at a higher risk of an ASEAN driven slowdown

Stressed

DBS

UOB

OCBC

DBS

UOB

OCBC

DBS

UOB

OCBC

9.0 8.0

8.0

9.0

7.0 5.0

6.0

6.0

4.0 2.0

4.0

4.0

10.0

8.0 8.0

10.0 8.0 5.0

4.0 5.0

5.0 5.0 6.0 2.0 2.0

6.0

12.0 10.0 5.0

7.0 8.0 8.0 5.0 2.0

8.0

15.0 10.0

8.0 12.0 12.0 8.0 2.0

10.0

8.0

9.0

7.0

6.0

6.7

3.9

4.0

4.2

6.0 4.0 2.0


Importantly, loan growth in itself is not a big driver of bank earnings. As a result, even if there is a divergence in overall loan growth (assuming NIMs remain flat), it is unlikely in itself to drive a big variance in earnings growth expectations. Figure 31: Loan growth scenarios for 2014E (YoY%) 12.0

10.0

8.0

Base

Normalised

Figure 32: Impact on profit growth expectations (%) DBS

Stressed

UOB

OCBC

0.0

10.0

-0.2 9.0

-0.4

8.0

-0.6

7.0

6.7

-0.8

6.0

6.0

-0.8

-1.0

4.0

4.2

4.0

3.9

-1.2

-0.8

-1.0 -1.2

-1.4

-1.3

-1.6

2.0

-1.8 0.0 DBS



UOB

OCBC

-2.0

-1.8

Normalised

Stressed


15

12 September 2013

Margins: Performance can potentially diverge in 2014 Stretched SGD (UOB) and USD (DBS and to some extent OCBC) balance sheet pose the key risks to margins going into 2014. Any short-term stress in the USD short-term funding markets (which in the past few quarter have been extremely benign for Singapore banks) and/or a sustained deposit competition for SGD deposits could adversely affect any chances of a recovery in NIMs. Funding costs will remain key to NIMs as we are yet to see an improvement in pricing power of banks. Figure 33: Singapore dollar (S$) loan-deposit ratio (%)

Figure 34: US dollar (US$) loan-deposit ratio (%)

100

180

4Q07

4Q09

4Q10

4Q12

2Q13

95

4Q07

4Q09

4Q10

4Q12

2Q13

161

90

86 81 77

80

82

85 84

127

120

55

116

112

101 100

60

60

146

140

79

69 70

70

160

90

80 83

80

101

99

95

90

89

82

51 50

60 40

40 DBS S$

UOB S$

DBS US$

OCBC S$


UOB US$

OCBC US$


Base case scenario: Funding markets remain stable and banks pricing power gradually increase in 2014E. Better overseas growth and lengthening of securities book tenure also contributes to a gradual recovery in NIMs.

Every 5 bp change in NIMs could have a 2-3% earnings impact

Normalisation scenario: Any improvement in pricing power is mostly offset by an increase in funding cost for banks, resulting in a further delay in NIM recovery. Stressed scenario: While loan pricing continues to remain under pressure, the tightening liquidity conditions result in a sustained increase in funding costs (both SGD and USD) which further results in NIM compression through 2014. Figure 35: NIM scenarios for 2014E (bp change YoY) 6

Base

5

Normalised

Stressed

4

4

Figure 36: Impact on profit growth expectations (%) 0

4 -1

2 0

0

0

0

-2

-2

-2

-2

-2

-3

-4

-4 -5

-6

-4 -5

-8 -8

-5

-8

-10

Normalised

-6 DBS



UOB

OCBC

DBS

UOB

-5

Stressed OCBC


16

12 September 2013

Credit costs: Just 'normalisation' could impact OCBC more While it is difficult to ascertain the relative quality of the loan books, the through cycle credit costs for banks generally tend to normalise towards their previous cycle averages. Based on previous cycle performance (excluding exceptional stress during the 1997 Asian financial crisis), the through cycle average credit cost for banks tend to average 35–45 bp on loans and 40–50 bp overall (including other securities). While DBS and UOB's performances were close to the through cycle average expectations during 2005–09, OCBC surprised the market with a much superior performance. It is difficult to assess at this stage whether OCBC might be able to repeat its superior relative performance through this cycle. But so far during this cycle, it has been the least conservative in terms of general provisioning (partly justified by more collateralised lending). Even if OCBC sees just a normalisation towards previous cycle averages, it could see a bigger earnings risk. Figure 37: Average SP+GP on loans (bp) 140 120

'95-'99

'00-'04

'05-'09

'10-1H13

Can OCBC repeat previous cycle's stellar performance?

Figure 38: Average total credit costs (bp) 140

132

116

120

'95-'99

'00-'04

100

80

80

60

60

'10-1H13

132

117

102 100

'05-'09

96

63

40

47 35

50

46

39

34

34

55

54

49

44

36

40

31

24 20

11

16

20

0

13

0 DBS

UOB

OCBC

DBS


UOB

OCBC


Credit cost performance of regional banking sectors critical Figure 39: Average sector credit costs (bp of loans) (CS universe) 200

Avg 2005-2010

186

2012

2013E

2014E

180 160 140 120

102

100

85

80

83

91

66

75

76

60 40

23

17

20

23

27

0 Indonesia

Malaysia

Thailand


As discussed earlier, higher overseas contribution has been a key driver behind the betterthan-expected loan growth performance through this cycle. While Singapore banks in


17

12 September 2013

general have superior and more stringent risk criteria compared to local banks in overseas markets, they cannot be immune to an overall deterioration in asset quality in the sector. OCBC has higher earnings risk even under a 'normalisation' scenario Base case scenario: There are no unforeseen credit events—2014E credit costs see only a slight increase compared to 2012–13E.

Every 5 bp change in credit costs could have a ~3% earnings impact

Normalisation scenario: NPLs continue to see a gradual and steady increase resulting in credit costs creeping towards previous cycle sector average at 40 bp levels. Stressed scenario: Regional economies see a significant slowdown in growth, with stress from interest rate or foreign exchange rate volatility. Under such a scenario, credit costs could witness a spike above historical averages. We assume an average 60 bp credit cost under this scenario (not overly aggressive in our view). Figure 40: Credit cost scenarios for 2014E (bp of loans) Base

70

Normalised

60

60

Figure 41: Impact on profit growth expectations (%)

Stressed

0

60

60

-2 -4

50

-3

-6 40

40

40

40

-8

35

-8

-10

30

30

-5

-12

24

-14

20

-16 10

-15

-15

-18 Normalised

-20

0 DBS

UOB

DBS

OCBC


-18

Stressed

UOB

OCBC


Non-interest income: The other key risk DBS (trading income) and OCBC (trading and insurance incomes) are the most exposed to the volatile capital market related revenue streams. Figure 42: Fee income as % of revenue

Figure 43: Trading income as % of revenue

30

18

DBS

28 26

OCBC

26 23 22

UOB

17

OCBC

21

20

18

22

22

21

19

18

21

21

12

12

0 2009

2010

2011



8

2012

1H13

-2

1

2007

8

5 3 0

8

6

4 2

9

8

4 2

2008

7

6

14

2007

9

10 8

18

16

16

13

14 23

22

18

26

25

24

20

10

DBS

16

24

22

UOB

28

4

4

5

1

-1 2008

2009

2010

2011

2012

1H13


18

12 September 2013

Stress testing valuations: OCBC looks relatively stretched In this section, we analyse relative valuations and stress test them for our risk scenarios. Overall, OCBC’s valuations appear the most stretched relative to peers and at most risk of a correction if our risk scenarios pan out.

DBS’ ROEs start to converge with peers, but valuation discounts persist While DBS’ ROEs appear to sustainably closing in on peers, the P/B discounts continue to persist, especially relative to OCBC. Figure 44: Core ROE (%)

Figure 45: Trailing P/B (x)

18 DBS ROE

UOB ROE

2.5

OCBC ROE

DBS

16

UOB

OCBC

2.1

14 1.7

12 10

1.3

8 0.9

6 4 Dec/01

Dec/03

Dec/05

Dec/07

Dec/09

Dec/11

Dec/13


0.5 Dec/01

Dec/03

Dec/05

Dec/07

Dec/09

Dec/11

Dec/13


OCBC’s relative valuations appear stretched OCBC versus DBS: On a relative P/B basis, OCBC's premium is still close to historical average levels. If adjusted for ROEs, OCBC's relative P/B premium continues to be much higher than historical averages. Figure 46: OCBC vs DBS—relative P/B (x)

Figure 47: OCBC vs DBS—relative P/B-ROE adjusted (%) 60%

1.5

OCBC/DBS PB-ROE

1.4

5Y avg

40%

1.3

20% 1.2 1.1

0%

1.0

-20%

0.9

-40%

0.8

0.7 Dec/01

-60% Dec/03

Dec/05

Dec/07

OCBC / DBS P/B



Dec/09 5Y avg

Dec/11

Dec/13

-80% Dec/01

Dec/03

Dec/05

Dec/07

Dec/09

Dec/11


19

12 September 2013

OCBC versus UOB—OCBC's relative P/B premium versus UOB continues to be close to historic highs. If adjusted for relative ROEs, OCBC’s P/B premium continues to be above historical averages. Figure 48: OCBC vs UOB—relative P/B (x)

Figure 49: OCBC vs UOB—relative P/B-ROE adjusted (%)

1.2

60%

1.2

50%

1.1

40%

1.1

5Y avg

30%

1.0

20%

1.0

10%

0.9

0%

0.9 0.8

-10%

0.8

-20%

0.7 Dec/01

OCBC/UOB PB-ROE

Dec/03

Dec/05

Dec/07

OCBC / UOB P/B

Dec/09

Dec/11

Dec/13

-30% -40% Dec/01

5Y avg


Dec/03

Dec/05

Dec/07

Dec/09

Dec/11


P/PPOP is a better reflection of the core earnings multiples in the current environment Given the stage of the asset quality cycle and the lack of clarity in terms of incremental loan loss provisioning required through the rest of the cycle, pre-provision operating profit (PPOP) gives a better reflection of the core earnings momentum. Looking at P/PPOP multiples might be a better way of gauging the relative core earnings multiples. OCBC continues to trade at a significant premium to peers and much above historic average levels. Figure 50: OCBC vs DBS – relative P/PPOP (x)

Figure 51: OCBC vs UOB – relative P/PPOP (x)

1.8

1.3

1.6

1.2

1.4

1.1

1.2

1.0

1.0

0.9

0.8

0.8

0.6 Dec/01

OCBC continues to trade at a significant premium to peers and much above historical average levels

Dec/03

Dec/05

Dec/07

OCBC / DBS P/PPOP



Dec/09 5Y avg

Dec/11

Dec/13

0.7 Dec/01

Dec/03

Dec/05

Dec/07

OCBC / UOB P/PPOP

Dec/09

Dec/11

Dec/13

5Y avg


20

12 September 2013

Relative to Singapore market: P/B-ROE relative valuations appear attractive Using our Credit Suisse GEM strategist Sakthi Siva's P/B-ROE relative model for Singapore banks relative to the Singapore market, all three Singapore banks look attractive compared to their historical average discounts. On a relative basis, DBS appears the most attractive both in terms of the absolute discount levels and relative to historic average. Interestingly, Singapore banks in general have traded at a discount to the overall market over the past three years despite a stronger-than-expected earnings momentum and improving profitability levels. Figure 52: P/B-ROE relative to Singapore market (%)

Figure 53: P/B-ROE relative to Singapore market (%) DBS

60% DBS

UOB

UOB

OCBC

0

OCBC

-0.2

40%

-5

20%

-3.7 -6.1

0%

-10

-20% -15

-40% -20

-60% -80% Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12


-25

-19.9 -23.1

-19.4 Current

Average


Relative to the NJA banks: Valuation premiums close to historical highs On trailing P/B (1.2x), while the Singapore banks sector is now trading close to 1 sd below historical average, their premium to the overall NJA banks sector is close to historical highs. Figure 54: Singapore banks MSCI trailing P/B (x)

Figure 55: Relative to NJA banks (x)

2.30

1.2

2.10 1.1 1.90

1.70

1.0

1.50 0.9 1.30 1.10

0.8

0.90 0.7 0.70 0.50 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

0.6 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Source: Datastream



21

12 September 2013

Similarly, looking at 12-month forward P/E (11.0x), while the Singapore banks sector are trading close to 1 sd below their historical average, their premium to the overall NJA banks sector is close to historic highs. Figure 56: Singapore banks MSCI 12 month P/E (x)

Figure 57: Relative to NJA banks (x)

19.0

1.6

17.0

1.5 1.4

15.0

1.3 13.0

1.2 11.0 1.1 9.0

1.0

7.0

0.9



Source: Datastream


OCBC's market implied ROEs are higher than our near-term expectations Using a cost of equity of 9.5% and terminal growth rate of 3.5%, we calculate the market implied ROEs for the Singapore bank stocks and compare it with our base case 2014 ROE expectations—while DBS and UOB’s market implied ROEs are below our base case estimates, OCBC’s market implied ROEs continue to be above our base case. Figure 58: Market implied ROE versus historical average

Figure 59: CS core ROE (%)

and CS 2014E expectations (%) 12.5

Market implied ROE

2011-1H13 avg ROE

CS ROE 2014

DBS ROE

12.2 12.0

12.0

UOB ROE

OCBC ROE

16

12.0

14

11.7 11.5

11.5

18

11.4

11.1 11.1

12 10

11.0 10.7

8

10.5

6

10.0

DBS



UOB

OCBC

4 Dec/01

Dec/03

Dec/05

Dec/07

Dec/09

Dec/11

Dec/13


22

12 September 2013

DBS remains our top pick in the sector The tables below summarise the implied ROEs and P/B multiples under various scenarios. Based on our estimates, DBS has the most potential for upside—as P/B multiples play catch-up with the sustainable improvement in ROEs and relatively lower downside risks under the normalised or stressed scenarios through 2014E. OCBC’s valuations, on the other hand, are already rich and potentially have more downside if one of our risk scenarios play out. UOB remains a defensive play in this environment with valuation levels close to warranted levels. DBS remains our top pick in the sector. Figure 60: 2014E ROE (%) 14.0 12.0

Market implied ROE

10.7

11.1

Figure 61: P/B (x)

CS ROE 2014

11.5

12.0

CS target

1.4

11.4 10.2

9.7

1.6

Stressed

12.2

11.5

10.6

10.0

Normalised

10.5 9.6

1.2

Current

Normalised

1.3

1.2

1.3

Stressed

1.3 1.3

1.2

1.2

1.1 1.1

1.1 1.0

1.0

1.0

8.0 0.8

6.0

0.6 4.0

0.4

2.0

0.2

0.0 DBS


UOB

OCBC

0.0 DBS

UOB

OCBC


DBS Group (DBS SP, S$16.31, OUTPERFORM, TP S$19.00). We expect overall earnings momentum to be relatively better for DBS (driven by better loan growth, resilient NIMs and non-interest income), with support from cheaper valuations compared to peers and removal of near-term M&A risk. DBS remains immune to the SGD funding competition in Singapore and local asset quality stress in ASEAN markets. Improving macro sentiment in Greater China is positive, but need more clarity on India exposure.

DBS has the most potential for upside as P/B multiples play catch-up and given relatively low downside earnings risks

United Overseas Bank (UOB SP, S$20.45, NEUTRAL, TP S$22.00). We expect a steady earnings momentum near term driven by a stabilising NIM profile. But we could potentially see more conservative loan growth near term with increasing macro risks across the region. Asset quality concerns over ASEAN exposure have also increased. UOB also remains relatively more exposed to SGD funding competition given a stretched 94% SGD loan-deposit ratio. Oversea-Chinese Banking Corp (OCBC SP, S$10.01, UNDERPERFORM, TP S$10.20). While stabilising NIMs provide some downside support to earnings, volatile insurance contribution (which could continue with market volatility) and a potential drag from higher credit costs (with increasing asset quality risks in ASEAN) could mean a weaker earnings momentum compared to peers in the near term. OCBC also has the most downside risks to earnings in the scenario of asset quality normalisation, based on our analysis. Its valuations remain expensive as compared to peers.


23

12 September 2013

Companies Mentioned (Price as of 11-Sep-2013) DBS Group (DBSM.SI, S$16.31, OUTPERFORM, TP S$19.0) Oversea-Chinese Banking Corporation (OCBC.SI, S$10.01, UNDERPERFORM, TP S$10.2) United Overseas Bank (UOBH.SI, S$20.45, NEUTRAL, TP S$22.0)

Disclosure Appendix Important Global Disclosures I, Anand Swaminathan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for DBS Group (DBSM.SI) DBSM.SI Date 08-Nov-10 14-Feb-11 20-Jul-11 15-Aug-11 09-Oct-11 07-Nov-11 02-Apr-12 02-Aug-13

Closing Price (S$) 14.12 14.98 14.96 14.05 11.54 12.66 14.18 17.54

Target Price (S$) 16.00 16.80 16.50 12.50 14.20 19.00

Rating N * N

R N

* Asterisk signifies initiation or assumption of coverage. N EU T RA L REST RICT ED

3-Year Price and Rating History for Oversea-Chinese Banking Corporation (OCBC.SI) OCBC.SI Date 02-Nov-10 20-Jul-11 15-Aug-11 09-Oct-11 03-Nov-11 24-Feb-12 09-Nov-12 28-Feb-13 02-Aug-13

Closing Price (S$) 9.30 9.67 9.21 7.89 8.20 8.99 9.10 10.10 10.74

Target Price (S$) 11.60 11.00 8.40 8.90 9.00 9.30 9.80 10.20

* Asterisk signifies initiation or assumption of coverage.


Rating O * O U

O U T PERFO RM U N D ERPERFO RM

24

12 September 2013

3-Year Price and Rating History for United Overseas Bank (UOBH.SI) UOBH.SI Date 09-Nov-10 24-May-11 20-Jul-11 15-Aug-11 09-Oct-11 03-Nov-11 24-Feb-12 03-May-13 05-Aug-13

Closing Price (S$) 18.56 19.12 19.86 18.87 16.57 16.26 18.11 21.80 21.87

Target Price (S$) 22.50 25.00 24.00 19.30 17.70 20.00 21.00 22.00

* Asterisk signifies initiation or assumption of coverage.

Rating N O * O N U N

N EU T RA L O U T PERFO RM U N D ERPERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neu trals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark ; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution

Rating

Versus universe (%)

Of which banking clients (%)

Outperform/Buy* 42% (55% banking clients) Neutral/Hold* 40% (49% banking clients) Underperform/Sell* 15% (39% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investmen t objectives, current holdings, and other individual factors.


25

12 September 2013

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for DBS Group (DBSM.SI) Method: Our 12-month target price of S$19.00 is based on the Gordon Growth Model. We use the average 2013-14E ROE as a proxy for medium term sustainable ROE, cost of equity (COE) of 9.5% and terminal growth (g) of 3.5%. Risk:

Apart from the performance of the overall economy in two of DBS's key markets, Hong Kong and Singapore, the risks to our target price of S$19.00 for DBS are: (1) the prime-HIBOR spread in Hong Kong; (2) treasury income’s dependence on the steepness of yield curve although DBS is trying to diversify into equity and commodity derivatives; (3) SIBOR’s impact on margins in Singapore; (4) loan growth in Hong Kong/Singapore as well as the emerging markets of China, India and Indonesia; (5) potential acquisitions; and (6) movement of SIBOR in Singapore.

Price Target: (12 months) for Oversea-Chinese Banking Corporation (OCBC.SI) Method: Our 12-month target price of S$10.20 for Oversea-Chinese Banking Corporation (OCBC) is based on a Gordon Growth Model. We use the average 2013-14E ROE (return on equity) as a proxy for medium term sustainable ROE, cost of equity (COE) of 9.5% and terminal growth (g) of 3.5%. Risk:

Apart from the general economic performance in OCBC's key markets of Singapore, Malaysia and Indonesia, the risks to our S$10.20 target price are: (1) a slowdown in loan growth or credit quality deterioration in Malaysia; (2) steepness of the yield curve, which affects profits in insurance subsidiary, Great Eastern Holdings; (3) the continuation of capital management (i.e. share buy-backs); (4) the movement of Singapore Interbank Offered Rate (SIBOR); and (5) normalisation of loan loss provisions.

Price Target: (12 months) for United Overseas Bank (UOBH.SI) Method: Our 12-month target price of S$22.00 for United Overseas Bank is based on a Gordon Growth Model. We use the average 2013-14E ROE (return on equity) as a proxy for medium term sustainable ROE, cost of equity (COE) of 9.5% and terminal growth (g) of 3.5%. Risk:

United Overseas Bank (UOB) is the most geographically diversified Singapore bank, with reasonable presence in Thailand, Malaysia and Indonesia. Apart from the general economic performance and monetary policy in these markets, the risks to our target price of S$22.00 for UOB are: (1) the potential impact by market dynamics in Malaysia, especially if loan growth softens or credit quality suffers; (2) the Thailand operation can potentially double its profits and stop being a drag on ROEs; (3) Indonesia interest rates and economic growth are key variables; and (4) potential for capital management by distributing special dividends and share buy-backs.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names

The subject company (DBSM.SI, UOBH.SI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (UOBH.SI) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (UOBH.SI) within the past 12 months Credit Suisse has received investment banking related compensation from the subject company (UOBH.SI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DBSM.SI, UOBH.SI) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (UOBH.SI) within the past 12 months Credit Suisse has a material conflict of interest with the subject company (DBSM.SI) . Credit Suisse is one of the joint financial advisors to DBS Group Holdings Limited in relation to the proposed acquisition of PT Bank Danamon Indonesia Tbk.

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.


26

12 September 2013

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (DBSM.SI, OCBC.SI, UOBH.SI) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch ....................................................................................................................................... Anand Swaminathan

Important MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.


27

12 September 2013

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority ("FCA") and the PRA. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the PRA and regulated by the FCA and the PRA or in respect of which the protections of the PRA and FCA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.


BK1695.doc

28