Singapore banks may face more earnings downgrades: Citi

Singapore banks may face more earnings downgrades: Citi

Q4 results may show weaker interest income and higher bad-loan charges

By CONRAD TAN

THE worst is not over for Singapore banks, which are likely to face more earnings downgrades in coming days, Citigroup analysts said this week.

‘Sell’ call: Citigroup analysts have a ’sell’ rating on all three Singapore-listed banks - DBS, OCBC and UOB - and are projecting further declines in the banks’ earnings this year
The banks’ fourth-quarter results - due out next month - will probably show weaker-than-expected net interest income from their main lending activities and higher charges for bad loans, triggering further cuts in earnings forecasts, said Citigroup analysts Robert Kong and Ivan Lim in a report.

With the banks’ shares now trading at close to their respective book values - which measure what their assets, less liabilities, are worth on their books - ‘banks look cheap, but the bad news is not over’, the analysts warned.

They have a ’sell’ rating on all three Singapore-listed banks - DBS Group, OCBC Bank and United Overseas Bank (UOB) - and are projecting further declines in the banks’ earnings this year.

Total net profit at the three banks is expected to fall 12 per cent to $5.07 billion in 2009, after sliding an estimated 11 per cent last year.

The Citi analysts predict that earnings per share this year will slump 29 per cent at DBS, 16 per cent at UOB and 10 per cent at OCBC.

Loans growth for the banks is likely to slow sharply to around 5 per cent, from a breakneck pace of 21 per cent in 2007 and an estimated 15 per cent last year.

Coupled with an expected contraction in net interest margins - which measure how much profit the banks make on loans after deducting funding costs - the slower lending growth will hit their net interest income, said the Citi analysts.

‘We believe that net interest income falls and further loans-related provision charges will provide fodder for the next leg of consensus earnings downgrades,’ they said.

Although the banks’ third-quarter earnings last year ‘gave us the first clear signs of the economic downturn that is looming’, the weakness then was mainly due to steep falls in non-interest income from trading and capital-market activities and sharply higher provisions relating to losses on debt securities, the analysts said.

The Q4 2008 results will likely show much slower growth in net lending as the banks turned more cautious, they said. ‘The banks noted that much of the loan growth booked in Q3 was in fact a lagged effect of draw-downs of facilities granted perhaps a year ago.’

After the third quarter, ‘management guidance is that banks have significantly tightened new loan approvals and that should be evidenced in sharply slower loan momentum as we move into 2009′, they added.

‘More immediately, we expect net interest margins to see further pressure, perhaps as early as in the Q4 results, not least because of the events of October when global interbank markets suffered a dislocation and short-term rates spiked.’

Separately, Garry Evans, chief equity strategist for Asia-Pacific at HSBC, said yesterday that it is too soon to be snapping up bank stocks.

‘We would be avoiding most of the financial-sector stocks in Asia,’ he told reporters at a briefing here. ‘Where we are in the cycle is where we would expect NPLs (non-performing loans) to be rising.

‘You don’t buy just because banks look cheap on valuations. The fundamentals of banks still don’t look very good.’

Source : Business Times - 14 Jan 2009

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Harder knock seen for property prices

Harder knock seen for property prices

Citigroup, Goldman downgrade most of real estate stocks covered to ’sell’
By ARTHUR SIM

EXPECTING the ‘worst recession in Singapore’s history’, Citigroup now believes that property prices could fall even lower than forecast so far.
 
Office sector: Citigroup now expects prime Grade A office rents to fall by another 60 per cent over the next two years, up from its earlier forecast of 50 per cent 
It also recommends a ’sell’ for property stocks covered (save one), saying that while these have recovered 30 per cent from 2008 lows, ‘the current rally is not sustainable’.

Citigroup recommends a ‘buy’ for Allgreen, saying that it offers a relatively high yield of about 6.5 per cent.

Goldman Sachs has also downgraded property stocks covered to ’sell’ (save one - although a different one).

It said: ‘With developers remaining reluctant to take losses to clear inventory and an environment where NAV expansion will likely be difficult, there is little room for multiples to expand - implying that stocks could be range-bound for most of 2009.’

Goldman Sachs believes, however, that CapitaLand is more likely than its peers to generate NAV growth in the next three years, given its diversified business model and capacity to benefit from the current market environment.

In the high-end segment, Citigroup says that properties such as Ardmore Park have seen price corrections of about 35 per cent from a year ago but still reckons prices could fall by another 30-40 per cent this year to reach 2003 and 1998 levels. This would imply a 55-60 per cent decline from the peak in 2007.

Similarly for the mid-tier segment, Citigroup believes a further price decline of around 35 per cent is possible, amounting to a 45 per cent decline from 2007 levels, while the mass-market segment could fall by another 10-15 per cent.

Its forecasts represent declines of around 10 percentage points lower than the most pessimistic forecasts to date.

But this is on the back of the worse-than-expected economic data which has prompted Citigroup to revise growth estimates with the GDP now forecast to contract by 2.8 per cent this year, surpassing the Asian financial crisis (-1.4 per cent) and the 2001 tech recession (-2.4 per cent).

Of greater concern to Citigroup analyst Wendy Koh is the possibility of more distress sales due to the deferred payment scheme (DPS).

Compounded by falling property values and banks offering loans at lower loan-to-valuation ratios, Ms Koh says: ‘This could potentially add further woes to the already weak residential market. Developers might have to consider offering top-up loans to such buyers.’

In its analysis of recently revealed DPS numbers, Phillip Securities Research said that of the 4,560 units expected to be completed this year, it is most likely that the units were bought at the lower 2006 prices. As such, these buyers will still be able to make a small profit, if any.

However, of the 2,540 DPS units to be completed in 2010, most would have been bought at the higher 2007 prices, when the URA price index went up by a hefty 28.1 per cent.

‘Those who bought in 2007 and later will encounter losses as the prices had risen by huge amounts and price correction would take place in 2009,’ it added.

Not spared either is the office sector. Citigroup’s Ms Koh says: ‘Pre-commitments aside, new supply coming on-stream in the next 12-18 months are unlikely to secure any tenants.’

Citigroup now expects prime Grade A office rents to fall by another 60 per cent over the next two years, up from its earlier forecast of 50 per cent.

And this only if net space given up in 2009 is about 50,000 square feet.

If this figure is higher, Citigroup believes islandwide occupancy could test the historic low of $4.50 per square foot.

 
Source : Business Times - 14 Jan 2009

Singapore Property - Buy, Sell, Rent, Invest

Mindy Yong

(+65)91002985

mindy@mindyyong.com