The following warrants over the 3 local banks have exercise prices close to their respective last traded underlying share prices:
Call warrant DBS MBL eCW091001 (H2QW) exercise price $11.60.*
Put warrant DBS MBL ePW091001 (H2RW) exercise price $10.80.*
Long dated warrant DBS MBL eCW110502 (H3IW) exercise price $13.00.*
Put warrant OCBC Bk MBLePW091102 (H2UW) exercise price $6.40.*
Call warrant UOB MBL eCW091203 (H8VW) exercise price $15.90.*
Put warrant UOB MBL ePW091102 (H2TW) exercise price $13.50.*
2Q09 results preview – no nasty shocks
MRE reported that the Singapore banks will begin reporting their 2Q09 results, with OCBC kicking off the season on 3 August. Collectively, MRE estimates a net profit of S$1.28bn for the three banks, representing contractions of 24% YoY and 8% QoQ. Key areas of focus remain the sustainability of non-interest income while still nascent NPL formation is expected to keep provisions low. MRE’s key pick in the sector remains DBS Group.
Mild yoy improvement in net interest income
MRE expects net interest income to see a mild 4% YoY improvement but 1.8% weaker QoQ due to their view of margins remaining weak given the low interest rate environment and a 1% QoQ improvement in gross loans. While the recent shift in short-term interbank rates may hold out the potential for gapping, a rise in the longer-term bond yield could have an offsetting impact.
Contraction in non-interest income
MRE forecast non-interest income to contract 9.5% YoY and 17.3% QoQ, due to their view that while equity markets may allow for better brokerage income, investment banking, wealth management as well as transactional banking fees remain relatively weak. However, mark-to-market gains and treasury income remain key swing factors for the banks, in MRE’s view.
NPL to remain low
MRE feels that non-performing loan (NPL) formation is expected to remain low, particularly on the domestic loan book, given the various government initiatives to help SMEs and employees. However, MRE believes that there will still be an inevitable rise in NPLs with the NPL ratio peaking next year. Near term, MRE estimates provisions to contract by 13.7% QoQ.
MRE outlook
The sector is currently trading at FY09E PER, PUP and P/BV of 18.1x, 7.8x and 1.4x, respectively. Compared with its historical trading range, the sector P/BV of 1.4x is still below the historical mean of 1.6x.
Similarly, the sector remains below the historical PUP mean of 9.8x but above the historical PER mean of 15.8x.
MRE believes an absence of any potential earnings surprise may cap share price movements although their preference for DBS Group remains. The group remains at a significant 0.5x discount to UOB on P/BV compared with the historical discount of 0.1x.
MRE believes a combination of sustained treasury income as well as potential announcement of a new CEO may be the price catalysts needed to bring its valuation closer to the sector.
MRE ratings and 12 month target prices
DBS: Outperform, $14.09
OCBC: Neutral, $6.76
UOB: Neutral, $14.45
Macquarie DBS Warrants
Trading Call Warrants (Short term bullish view)
DBS MBL eCW090902 (HJ4W) exercise price $7.40.*
DBS MBL eCW091102 (HR1W) exercise price $9.30.*
DBS MBL eCW091002 (HX2W) exercise price $10.20.*
DBS MBL eCW091001 (H2QW) exercise price $11.60.*
DBS MBL eCW091202 (H8AW) exercise price $12.90.*
Trading Put Warrants (Short term bearish view)
DBS MBL ePW091001 (H2RW) exercise price $10.80.*
DBS MBLePW091002 (HX3W) exercise price $8.88.*
DBS MBL ePW091102 (HQ8W) exercise price $7.50.*
Long Dated Warrants (Long term bullish view)
DBS MBL eCW110404 (HJ6W) exercise price $7.50.*
DBS MBL eCW110103 (G9WW) exercise price $9.50.*
DBS MBL eCW110502 (H3IW) exercise price $13.00.*
DBS MBL iCW100401 (G9LW) exercise price $6.80.*
Macquarie OCBC
Trading Call Warrants (Short term bullish view)
OCBC Bk MBLeCWQ091203 (HS9W) exercise price $5.50.*
Trading Put Warrants (Short term bearish view)
OCBC Bk MBLePW091102 (H2UW) exercise price $6.40.*
OCBC Bk MBLePW091002 (HX4W) exercise price $5.00.*
Macquarie UOB Warrants
Trading Call Warrants (Short term bullish view)
UOB MBL eCW090902 (HI4W) exercise price $9.80.*
UOB MBL eCW091005 (H1KW) exercise price $11.50.*
UOB MBL eCW091102 (H2SW) exercise price $13.80.*
UOB MBL eCW091203 (H8VW) exercise price $15.90.*
Trading Put Warrants (Short term bearish view)
UOB MBL ePW091102 (H2TW) exercise price $13.50.*
UOB MBL ePW091005 (H1LW) exercise price $10.50.*
Long Dated Warrants (Long term bullish view)
UOB MBL eCW110404 (HJ7W) exercise price $10.00.*