July 24, 2013

SINGAPORE

BANKS

SHORT TERM (3 MTH)

LONG TERM

SECTOR FLASH NOTE |

CIMB Analyst(s)

Watch out for poor trading

While the banks have beaten expectations in the past few quarters, we doubt they can manage an encore performance this season. Higher 10YR yields will not be a positive influence on net interest margins just yet, while their investment securities portfolios could take a beating.

Kenneth NG, CFA

T (65) 6210 8610 E kenneth.ng@cimb.com

Figure 1: US Treasuries and ASEAN bonds have been sold down in 2Q

% 4.4 4.0 3.6 10-yr SGS yield 10-yr MGS 10-yr IDR Notes (RHS) CS Asian AAA corporate bond yields 10-yr US Treasuries % 12 10 8 6 4 2 0

3.2

Highlighted Companies DBS

High-conviction top pick. 1Q ROEs were ahead of peers though the presence of chunky deals did inflate 1Q profitability; this should not detract from nascent revival of trade finance. 2Q results should provide further insight to trades sustainability.

2.8 2.4 2.0 1.6 1.2

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

OCBC
The bank guided that mortgage re-pricing can still weigh down on margins ahead. Wealth management was the only fee income stream holding up non-interest income in 1Q; this might not sustain in 2Q. Insurance earnings could be hit by May-Junes bond sell-down.

SOURCES: CIMB, Bloomberg

UOB
Margin pressure is easing, excluding the effects of low spreads from chunky deals in 1Q. The fee franchise has consistently delivered as UOB benefits from trade fees, loan fees, investment-related fees and a bancassurance tie-up with Prudential.

We remain Neutral on the sector and prefer not to chase the banks further after Julys rally. We reckon that the 2Q results season could prove to be a short-term share price dampener, as treasury earnings come in muted and results miss consensus expectations. We see better buying opportunities post-results. Our top pick remains DBS (Outperform, TP: S$19.02).

What Happened
The three banks announced that they will report their 2Q13 earnings on 1st / 2nd August. Events that characterised 2Q include 1) a broad sell-off in bonds and equities (May-June); 2) a dearth of debt issuance and equity IPOs in June; 3) buoyant US$ system loan growth, slowing Singapore mortgage loan growth; 4) lowered GDP growth projections for China, Indonesia and Thailand; and 5) recent MAS concerns on household indebtedness.

generally below Street expectations. We reckon that the key feature in 2Q would be poor trading income by all three banks courtesy of: 1) the bond market sell-off and 2) internal trading restrictions imposed after the SIBOR incident, as well as by the market (higher volatility). As all risk assets have been sold down in late-2Q, capital markets-related fees are also unlikely to prosper either. Trade finance might hold up better though; despite falling global trade finance volumes, Singapores non-S$ loan market still seems to be doing quite well i.e. more trade is now being funded by entities sitting in Singapore. We do not expect banks credit costs to rise sharply but highlight rising credit card charge-off rates and MASs recent caution.

What You Should Do

We believe an anticipated weak 2Q season should be reason enough for investors take profit on the banks first, after Julys rally. We see better entry levels post-results.

What We Think
Our 2Q net earnings expectations are: DBS at S$835m; OCBC at S$666m; and UOB at S$660m. We are

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

BANKS
July 24, 2013

Figure 2: Sector Comparison - South & South-East Asia

Company DBS Group OCBC United Overseas Bank Singapore average Bank Bukopin Bank Central Asia Bank Danamon Bank Mandiri Bank Negara Indonesia Bank Panin Bank Rakyat Indonesia Bank Tabungan Negara Bank Tabungan Pensiunan Indonesia average Affin Holdings Alliance Financial Group AMMB Holdings BIMB Holdings Hong Leong Bank Malayan Banking Bhd Public Bank Bhd RHB Capital Bhd Malaysia average Bangkok Bank Bank of Ayudhya Kasikornbank Kiatnakin Bank Krung Thai Bank Siam Commercial Bank Thanachart Capital Tisco Financial Group TMB Bank Thailand average ANZ Banking Group Bank of Queensland Bendigo & Adelaide Bank Commonwealth Bank National Australia Bank Westpac Banking Corp Australia average Allahabad Bank Andhra Bank Axis Bank Bank of Baroda Bank of India Canara Bank Corporation Bank Federal Bank HDFC Bank ICICI Bank Indian Bank Indusind Bank ING Vysya Bank J&K Bank Oriental Bank of Commerce Punjab National Bank State Bank of India Union Bank of India Yes Bank India average South & South-East Asia Average Bloomberg Ticker DBS SP OCBC SP UOB SP BBKP IJ BBCA IJ BDMN IJ BMRI IJ BBNI IJ PNBN IJ BBRI IJ BBTN IJ BTPN IJ AHB MK AFG MK AMM MK BIMB MK HLBK MK MAY MK PBK MK RHBC MK BBL TB BAY TB KBANK TB KK TB KTB TB SCB TB TCAP TB TISCO TB TMB TB ANZ AU BOQ AU BEN AU CBA AU NAB AU WBC AU ALBK IN ANDB IN AXSB IN BOB IN BOI IN CBK IN CRPBK IN FB IN HDFCB IN ICICIBC IN INBK IN IIB IN VYSB IN JKBK IN OBC IN PNB IN SBIN IN UNBK IN YES IN Recom. Outperform Underperform Neutral Outperform Neutral Underperform Outperform Outperform Underperform Neutral Outperform Neutral Underperform Neutral Neutral Outperform Underperform Outperform Outperform Outperform Underperform Underperform Outperform Outperform Outperform Outperform Neutral Neutral Underperform Outperform Neutral Underperform Underperform Neutral Underperform Neutral Neutral Outperform Outperform Underperform Outperform Outperform Neutral Neutral Outperform Outperform Underperform Neutral Outperform Neutral Neutral Neutral Underperform Neutral Price (local curr) 16.69 10.39 21.29 650 10,000 5,550 8,500 4,225 650 7,900 1,150 4,525 4.30 5.69 7.93 4.11 14.30 10.66 17.04 8.47 208.00 37.50 185.50 50.00 19.30 165.00 38.00 41.25 2.40 28.91 9.27 10.46 71.88 30.41 29.40 85.30 78.95 1,200.10 589.20 211.15 319.85 328.70 380.15 682.05 974.45 107.55 459.05 573.20 1,246.00 174.00 645.35 1,824.70 155.65 423.90 Target Price (local curr) 19.02 10.17 21.24 1,300 11,100 4,000 11,300 5,500 820 8,900 1,520 5,000 3.70 5.03 7.35 4.22 13.70 11.90 18.70 10.50 214.00 40.00 240.00 77.00 29.00 220.00 48.00 52.00 2.10 26.93 9.55 8.67 58.52 30.99 26.43 131.00 97.00 1,600.00 924.00 312.00 578.00 460.00 400.00 714.00 1,371.00 197.00 490.00 639.00 1,493.00 285.00 807.00 2,202.00 231.00 520.00 Market Cap (US$ m) 32,317 28,279 26,584 510 24,255 5,233 19,511 7,751 1,540 19,172 1,195 2,600 2,021 2,770 7,516 1,379 8,088 29,206 18,764 6,643 12,828 7,360 14,344 1,350 8,715 18,094 1,481 1,067 3,381 73,270 2,739 3,981 107,036 65,986 84,296 714 740 9,423 4,156 2,107 2,372 842 1,088 27,280 18,831 774 4,025 1,795 1,011 850 3,819 20,899 1,555 2,553 Core P/E (x) CY2013 CY2014 11.0 10.6 13.0 12.2 11.8 11.1 11.8 11.2 5.1 18.5 14.2 11.0 9.2 6.4 9.8 7.5 10.8 11.7 11.2 14.9 13.2 14.3 12.8 14.6 14.1 11.1 13.6 10.6 13.5 10.4 8.6 8.0 11.2 7.6 6.7 18.0 10.5 12.3 11.1 12.0 15.0 11.6 13.0 13.0 3.4 3.6 9.9 5.3 4.1 4.2 3.5 8.8 21.5 12.1 3.1 17.4 13.0 5.7 3.3 4.3 8.4 3.8 10.2 9.1 11.8 4.2 15.4 12.0 9.3 7.6 5.5 8.5 6.1 8.7 9.9 10.2 13.1 11.7 12.1 11.2 13.4 12.5 9.7 12.2 9.7 11.1 9.1 7.3 7.3 9.8 7.0 6.4 12.3 9.2 11.7 10.3 11.8 14.3 10.6 12.7 12.4 2.7 3.4 8.9 4.6 3.5 3.5 3.1 7.3 18.3 11.0 2.7 14.2 11.2 5.1 2.7 3.9 7.3 3.3 8.7 7.9 10.8 3-year EPS CAGR (%) 2.7% 3.8% 6.3% 4.7% 21.9% 15.8% 5.6% 18.7% 19.0% 14.3% 10.9% 10.7% 20.8% 15.2% 3.4% 11.8% 12.5% 17.9% 11.4% 5.4% 11.3% 8.1% 10.2% 10.8% 18.0% 16.3% 17.1% 15.4% 17.3% 12.1% 12.2% 82.3% 17.5% 6.7% 36.2% 4.7% 6.3% 9.4% 5.7% 8.6% 10.3% 3.1% 6.4% 6.4% 13.0% 10.9% 7.7% 5.7% 13.7% 10.2% 7.3% 20.7% 16.4% 6.8% 20.6% 5.8% 8.7% 10.1% na na na P/BV (x) CY2013 CY2014 1.21 1.15 1.30 1.23 1.35 1.25 1.28 1.21 0.90 3.91 1.71 2.19 1.55 0.83 2.46 1.03 2.59 2.30 1.01 2.15 1.81 1.98 2.02 2.24 2.92 1.38 2.09 1.34 1.84 2.04 1.18 1.35 2.26 0.92 1.45 1.70 1.69 1.84 1.09 1.01 2.62 1.72 1.98 2.00 0.38 0.49 1.54 0.74 0.54 0.56 0.48 0.96 3.98 1.56 0.41 2.88 1.76 1.09 0.39 0.66 1.16 0.54 2.26 1.29 1.76 0.78 3.24 1.55 1.82 1.33 0.72 2.02 0.91 2.00 1.93 0.96 2.02 1.65 1.81 1.77 2.09 2.54 1.25 1.91 1.24 1.68 1.75 1.09 1.21 1.99 0.84 1.27 1.55 1.51 1.75 1.04 0.99 2.49 1.64 1.90 1.91 0.34 0.44 1.35 0.65 0.48 0.50 0.43 0.87 3.41 1.41 0.37 2.47 1.56 0.92 0.35 0.58 1.02 0.48 1.87 1.14 1.62 Recurring ROE (%) CY2013 CY2014 CY2015 11.4% 11.2% 11.3% 10.4% 10.4% 10.4% 12.0% 11.7% 11.9% 11.3% 11.1% 11.2% 18.8% 23.3% 12.7% 22.0% 18.3% 13.9% 28.0% 14.8% 27.4% 21.6% 9.2% 14.7% 14.4% 14.5% 16.8% 15.3% 22.4% 12.7% 15.8% 13.3% 14.3% 21.4% 14.3% 17.4% 21.6% 13.5% 23.2% 9.9% 17.1% 15.0% 9.8% 8.2% 17.7% 15.1% 15.6% 15.6% 11.8% 14.1% 17.2% 15.2% 13.9% 14.9% 14.7% 11.9% 20.6% 13.7% 13.9% 18.7% 14.3% 21.5% 12.4% 16.3% 15.1% 15.4% 24.3% 15.5% 15.5% 19.9% 23.0% 13.6% 21.5% 18.7% 14.0% 26.0% 15.8% 25.8% 21.3% 9.6% 16.0% 14.7% 15.6% 16.8% 16.2% 21.8% 13.5% 16.4% 13.3% 15.9% 20.8% 15.5% 17.5% 21.6% 12.5% 21.4% 13.2% 17.4% 15.2% 10.3% 8.2% 17.5% 15.9% 15.5% 15.7% 13.3% 13.7% 16.3% 15.3% 14.4% 15.1% 14.6% 12.6% 20.3% 13.6% 14.1% 19.0% 14.7% 19.7% 13.5% 15.8% 15.0% 15.4% 23.6% 15.5% 15.6% 21.4% 22.2% 13.8% 21.4% 19.1% 14.4% 23.9% 16.3% 24.6% 20.8% 9.8% 16.5% 14.6% 15.9% 16.3% 16.4% 21.3% 13.8% 16.4% 13.4% 16.8% 20.1% 16.4% 17.3% 21.5% 12.7% 20.9% 13.8% 17.5% 14.9% 10.5% 8.2% 17.1% 15.6% 15.3% 15.5% 14.2% 13.9% 16.3% 15.4% 14.9% 15.1% 15.2% 13.9% 20.2% 13.7% 15.4% 19.9% 15.8% 19.0% 14.7% 14.9% 15.3% 15.3% na na na P/PPOPS (x) CY2013 CY2014 8.1 7.8 9.2 9.0 8.8 8.4 8.7 8.3 3.6 13.4 6.2 7.0 5.9 3.8 6.8 4.6 7.4 7.6 7.1 10.9 8.7 4.6 9.2 10.2 9.7 6.2 9.0 7.2 6.3 6.5 5.1 5.0 7.6 1.5 3.7 7.4 6.1 7.7 6.3 7.6 9.7 6.8 8.2 8.1 2.9 11.3 5.5 5.8 5.1 3.3 6.0 4.0 5.9 6.5 6.7 9.3 7.8 3.9 8.2 9.5 8.6 6.0 8.2 6.7 5.8 5.8 4.5 4.6 6.6 2.1 3.5 6.7 5.7 7.3 5.9 7.5 9.3 6.5 7.8 7.7 Dividend Yield (%) CY2013 CY2014 3.7% 3.9% 3.3% 3.6% 3.7% 3.8% 3.6% 3.8% 4.8% 1.2% 2.2% 1.6% 1.8% 0.0% 2.4% 2.3% 0.0% 1.7% 4.5% 3.3% 3.3% 3.5% 2.0% 4.1% 3.3% 2.7% 3.4% 3.8% 2.9% 2.4% 5.8% 5.0% 3.5% 3.9% 5.8% 1.7% 3.5% 5.6% 6.2% 5.7% 5.0% 6.3% 6.0% 5.6% 5.9% 1.4% 2.3% 1.9% 2.2% 0.0% 2.6% 2.6% 0.0% 1.9% 4.9% 3.8% 3.8% 4.1% 2.0% 4.5% 3.7% 3.1% 3.8% 4.1% 3.6% 2.7% 6.8% 5.4% 4.1% 4.2% 6.1% 2.5% 3.9% 5.9% 6.5% 5.7% 5.2% 6.7% 6.3% 5.9%

1.1 1.0 7.0% 7.5% 1.5 1.4 7.3% 8.6% 5.3 4.7 1.6% 1.8% 2.5 2.1 3.7% 4.0% 1.5 1.3 4.7% 5.1% 2.0 1.7 4.1% 4.5% 1.5 1.4 5.9% 6.0% 4.2 3.7 2.4% 2.4% 12.3 10.3 0.9% 1.0% 7.5 6.6 2.1% 2.2% 1.4 1.2 6.6% 7.3% 10.1 8.2 0.7% 0.8% 7.7 6.4 1.0% 1.1% 3.2 2.9 3.1% 2.8% 1.3 1.2 6.5% 6.6% 2.0 1.8 4.5% 4.9% 3.8 3.4 2.3% 2.6% 1.5 1.3 5.1% 5.6% 6.0 5.1 1.5% 1.7% 4.4 3.9 2.2% 2.4% 7.1 6.6 4.1% 4.4% SOURCES: CIMB, COMPANY REPORTS

Calculations are performed using EFA Monthly Interpolated Annualisation and Aggregation algorithms to December year ends

BANKS
July 24, 2013

Figure 3: Sector Comparison - North Asia

Company Agricultural Bank of China Bank of China Bank of Communications China CITIC Bank China Construction Bank China Merchants Bank China Minsheng Bank Chongqing Rural Comm Bank ICBC Hong Kong average BS Financial Group DGB Financial Group Hana Financial Group Industrial Bank of Korea KB Financial Group Shinhan Financial Group Woori Finance Holdings Korea average Chailease Holding Chang Hwa Bank CTBC Financial E.Sun Financial First Financial Hua Nan Financial Mega Financial SinoPac Financial Taishin Financial Taiwan average North Asia Average Bloomberg Ticker 1288 HK 3988 HK 3328 HK 998 HK 939 HK 3968 HK 1988 HK 3618 HK 1398 HK 138930 KS 139130 KS 086790 KS 024110 KS 105560 KS 055550 KS 053000 KS 5871 TT 2801 TT 2891 TT 2884 TT 2892 TT 2880 TT 2886 TT 2890 TT 2887 TT Recom. Outperform Neutral Neutral Neutral Outperform Neutral Neutral Neutral Outperform Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Underperform Outperform Outperform Neutral Neutral Outperform Underperform Underperform Price (local curr) 3.06 3.15 4.93 3.51 5.44 12.96 7.78 3.14 4.86 14,950 16,550 34,550 11,300 34,850 39,100 11,300 71.10 17.35 19.35 20.05 18.45 17.40 25.00 14.90 13.65 Target Price (local curr) 4.14 3.22 5.41 3.81 7.77 14.22 8.69 3.38 6.38 20,000 21,000 44,000 14,000 46,000 52,000 13,000 95.90 13.90 21.90 23.10 18.90 18.00 28.50 12.10 11.61 Market Cap (US$ m) 132,786 118,323 46,472 24,916 175,379 37,744 36,763 3,764 222,581 2,584 1,983 8,953 5,557 12,035 16,573 8,141 2,151 4,200 8,893 3,358 5,010 5,016 9,567 3,769 3,144 Core P/E (x) CY2013 CY2014 4.5 4.0 5.0 4.5 5.1 4.6 4.7 3.9 5.2 4.6 5.0 4.4 4.7 4.4 4.1 3.6 5.4 4.9 5.0 4.5 7.8 7.6 7.8 6.8 7.7 9.1 8.0 8.0 10.5 14.3 10.1 11.5 13.3 15.0 11.7 11.5 10.9 11.8 5.3 7.1 7.0 7.7 6.0 6.6 7.7 6.3 7.0 9.9 14.4 9.8 10.8 12.0 14.8 10.6 11.1 10.7 11.2 4.8 3-year EPS CAGR (%) 17.7% 10.4% 4.4% 7.2% 13.3% 10.6% 7.8% 13.9% 9.7% 11.8% 8.0% 8.6% -10.0% 1.6% 8.8% 5.5% 2.3% 3.7% 18.1% 1.4% 6.4% 9.5% 9.5% 6.5% 10.0% 3.2% 0.8% 10.3% 11.4% P/BV (x) CY2013 CY2014 0.90 0.78 0.76 0.68 0.69 0.62 0.59 0.53 0.99 0.86 0.94 0.81 0.91 0.73 0.64 0.57 1.04 0.91 0.90 0.79 0.81 0.80 0.50 0.44 0.52 0.69 0.46 0.55 2.29 1.15 1.30 1.25 1.08 1.10 1.25 1.07 0.95 1.19 0.88 0.74 0.74 0.48 0.42 0.49 0.64 0.44 0.52 2.02 1.08 1.17 1.13 1.01 1.05 1.17 1.01 0.88 1.10 0.77 Recurring ROE (%) CY2013 CY2014 CY2015 21.4% 20.9% 21.1% 16.0% 16.1% 16.8% 14.0% 14.3% 14.7% 13.1% 14.3% 14.5% 20.4% 20.2% 20.3% 20.2% 19.8% 20.1% 20.6% 18.2% 17.9% 16.6% 16.9% 17.7% 20.4% 19.9% 19.4% 18.9% 18.7% 18.8% 11.1% 11.2% 6.8% 6.8% 7.1% 8.1% 6.1% 7.3% 22.3% 8.4% 13.5% 11.2% 8.4% 7.6% 11.3% 9.8% 9.6% 10.5% 17.4% 11.0% 10.9% 6.4% 7.1% 7.6% 8.6% 7.2% 7.7% 20.4% 7.8% 12.6% 11.0% 8.7% 7.3% 11.4% 9.4% 8.5% 10.2% 17.3% 11.0% 10.8% 6.6% 7.4% 7.7% 8.8% 7.7% 7.9% 20.4% 7.7% 12.4% 11.1% 9.0% 7.6% 11.5% 9.4% 8.4% 10.3% 17.5% P/PPOPS (x) CY2013 CY2014 2.9 2.6 3.1 2.8 2.9 2.6 2.4 2.2 3.4 2.9 3.2 2.8 2.9 2.7 2.8 2.4 3.6 3.2 3.2 2.9 4.2 4.0 3.5 2.3 3.5 4.3 2.2 3.3 6.4 13.3 8.1 8.5 9.3 9.2 8.7 10.2 5.0 8.4 3.3 3.8 3.7 3.4 2.2 3.2 3.9 2.1 3.1 6.2 13.2 7.9 8.1 8.8 9.2 8.0 9.8 4.9 8.1 3.0 Dividend Yield (%) CY2013 CY2014 7.8% 8.8% 6.6% 7.4% 4.9% 5.5% 5.3% 6.4% 6.7% 7.6% 4.6% 5.2% 4.8% 5.2% 7.4% 8.4% 6.5% 7.2% 6.5% 7.3% 2.3% 2.4% 1.7% 3.1% 2.0% 1.8% 1.8% 2.0% 4.3% 0.6% 2.8% 1.6% 2.6% 3.2% 4.3% 2.2% 1.6% 2.8% 6.0% 3.0% 3.0% 2.0% 3.5% 2.9% 2.3% 2.2% 2.6% 4.5% 0.6% 3.1% 1.9% 3.0% 3.3% 4.7% 2.3% 1.6% 3.0% 6.7%

SOURCES: CIMB, COMPANY REPORTS

BANKS
July 24, 2013

Common 2Q13 features for the banking sector

Treasury income: We believe that the key feature of the 2Q13 results season for the banks would be poor trading income. With the spike in 10YR yields (a bond market sell-down) in May-June, we expect the banks to suffer losses on their investment securities trading portfolios. The censure of 20 banks in Singapore for trying to rig the SIBOR benchmark will likely also trigger more internal restrictions on house traders. Likewise, the high volatility in May-June is likely to have triggered stop-loss for trading activity. Taken together, we believe that all three banks trading-related incomes could be very muted in 2Q. We suspect that the banks are more likely to miss than beat the markets second quarter results expectations.
Figure 4: Singapore corporate debt issuance (US$bn) - monthly
Amt Issued (US$bn)
No. of issues

Figure 5: Singapore corporate debt market (US$bn) 1H

Amt Issued (US$bn) No. of issues

4.5

4.0 3.5 3.0

2.5 2.0 1.5 1.0 0.5 0.0 Jan-13 Jan-13 Amt Issued (US$bn) No. of issues 2.1 15 Feb-13 Feb-13 2.7 8 Mar-13 Mar-13 3.9 15 Apr-13 Apr-13 2.5 17 May-13 May-13 3.4 18 Jun-13 Jun-13 2.0 11

20 18 16 14 12 10 8 6 4 2 0

18.0 16.0 14.0 12.0

10.0 8.0 6.0 4.0 2.0 0.0 Amt Issued (US$bn) No. of issues 1H09 1H10 1H11 1H12 1H13

90 80 70 60
50 40 30 20 10 0

2.3
24

8.1
45

7.5
45

16.4
62

16.6
84

SOURCES: CIMB, Bloomberg

SOURCES: CIMB, Bloomberg

Fee income: With the bond market sell-off in the second half of 2Q, our data track shows that corporate debt issuance activity has also tapered off quite sharply in June. On the surface, Singapores corporate debt issuance in 1H13 looks comparable to 1H12, but a lot of that activity was in 1Q13, while 2Q was slow, particularly in June. Likewise, some REITs and business trust deals were also pushed back to 3Q. All these data points suggest that structured product sales and wealth management revenues might be relatively muted in late-2Q.
Figure 6: Singapores system loans growth (% ytd) strong in 1H, but will slow down in 2H
% 0.15

Figure 7: Global trade finance flows have tapered off

10.4%

0.10
6.2% 0.05 3.0% 1.7% 1.4% 0.0% 0.00 -1.1% -0.05 Jan Feb Mar Apr 4.3% 6.9%

9.2% 8.1%

8.8%

7.0% 7.1%
5.2% 5.1%

4.1%

System YTD Loans Growth - 2012 May Jun Jul

System YTD Loans Growth - 2013 Aug Sep Oct Nov Dec

SOURCES: CIMB, MAS

SOURCES: CIMB, Trade Finance Journals

Loan growth and margins: On the lending business, 2Q system loan growth is likely to be in the 3.5-4.0% qoq range. DBU loan growth (May) is +7.7% YTD while ACU loan growth (May) is +11.1% YTD. Despite slower domestic credit growth (as mortgage growth tapers off), data suggests that Singapore is growing as a hub for non-S$ trade finance loans. DBS and OCBC are the two banks that have seen a growing proportion of US$ loans, vs. overall loan book. This is all the more impressive when one puts these trends against the macro backdrop of falling global trade finance volumes. We believe that DBS and selected
4

BANKS
July 24, 2013

Asian-based banks are taking a growing share of the global trade funding market. Funding trade is not a high-margin lending business and the payoffs are likely to come from treasury-related earnings or fees. The growing mix of US$-loans is likely to keep margins low, so the focus for topline growth for the three banks remains non-interest income. We see more upside for margins only nearer the end of 2013 - if 10YR yields stay stable, we believe the banks will attempt to earn gapping profits thereafter.
Figure 8: USD loans as a proportion of total loans
34% 30% 26% 23.4% DBS OCBC

Figure 9: Credit card charge-off rates

32.6%
In S$ m 5,500 5,000 5.50 4,500 4,000 3,500 4.50
3,000

New billings (S$ m) Rollover balance (S$ m) Charge-off rate (bad debts written off, in %, RHS) Historical average charge off rate (%)

% 6.00

UOB

5.00

22%
18% 14%

2,500

4.00

12.1%

2,000 3.50 1,500

10%
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13

1,000 Jan-07

3.00 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

SOURCES: CIMB, Company

SOURCES: CIMB, MAS

Credit quality. Credit card charge-off rates in Singapore continue to climb. We take this as a leading indicator of household over-leveraging. Credit card charge-off rates have quietly climbed back to historical charge-off rate levels (500bp). The figure is not alarming by itself but taken together with 1) Februarys MAS car financing restrictions; 2) Junes household debt servicing framework for property loans; and 3) MASs data indicating that 10-15% of households could have over-extended themselves beyond the 60%-debt servicing ratios; we note that there is cause for concern for a small segment of households. By and large, the system is fine as banks average property LTVs are 40-50%, average mortgage servicing ratios (at current 1.5% mortgage rates) are below 30%, and banks tier-1 capital are 12.9% or higher. But not all households are average, and as more data is disclosed by MAS, those at the extreme do seem vulnerable to defaults when system unemployment rises or mortgage rates normalise. We are cognisant of the regulators concerns on a segment of the population. That said, with full employment, falling inflation and marginally rising mortgage rates in 2013 though, we do not expect any major uptick in NPL in this upcoming result season.

Expectations for DBS (results on 1st August)

We expect DBSs 2Q13 net profit (CIMB: S$835m vs. consensus S$887m) to ease down 12% qoq as 1Q13 was extremely strong on the back of: 1) investment banking and other capital markets-related fees being higher-than-usual because of huge fees earned from the Thai Bev deal; 2) wealth management fees showing up partly from DBS HK pursuing a successful wealth strategy; and 3) new POSB mortgage product helping to mitigate margin pressure. We reckon that 2Q13 will see the toning down of some of the positives from the first two drivers. IB fees will likely ease down sequentially as it compares against a high base in 1Q, while 2Q debt-capital markets activity in June was muted and some equity capital market deals were pushed back into 3Q. Providing some ballast for non-interest income is the presence of trade finance flows re-surfacing in 1Q. We think that DBS has done very well in this space and we hope to see its trade finance volumes hold up in the midst of rising competition from Chinese banks. The trade finance business in Asia today is seeing a new set of Asian-based
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competitors take share aggressively and DBS is one of them; DBS should do relatively well even as data shows global trade finance volumes coming down in 1H13. The negatives to watch out for would be 1) how much trading profits will get hurt from the sudden selloff in global bonds in mid-May to June; 2) if trade finance flows can hold up as China slows down rapidly this quarter; and 3) whether higher NPLs for its South Asia loan book is part of a new trend that we should be worried about, given continued difficulties with the Indian economy and DBSs historical Achilles heel of seeing NPLs from its non-Singapore loan book showing up every now and then. We suspect that the impact of lower trading profits will drag down ROEs quite a bit, we expect 2Q ROEs to come down to the 10.5%-10.7% range, down from 12.0% in 1Q. Further ahead in 3Q, we expect ROEs to rebound from 2Q levels as a small window for equity deals have opened and the steeper yield curve provides some scope for gapping. Our target price for DBS (Outperform) is S$19.02, based on 1.38x CY13 P/BV (ROE: 11.4%, COE: 9.6%, g: 4.9%). On the PT Bank Danamon deal, we would not be surprised if Bank Indonesia takes its time to approve the deal, and the deadline extended again.
DBSs 2Q expectations : S$835m
Figure 10: DBSs 2Q13 results expectations
FYE Dec (S$ m) Net interest income Non-interest income Total income Overhead expenses Pre-provision profit Loan loss provisions Exceptionals Associates' contrib Pretax profit Tax Tax rate (%) Minority interests Net profit Core net profit EPS (cts) Core EPS (cts) 2QFY13 2QFY12 1,334 692 2,026 (933) 1,093 (86) 38 1,045 (154) 15 (56) 835 835 135 135 1,324 621 1,945 (872) 1,073 (104) 36 1,005 (143) 14 (52) 810 810 134 134 yoy % 1QFY13 qoq % 2QFY13 2QFY12 chg chg Cum Cum 0.8 1,327 0.5 2,661 2,660 11.5 990 (30.1) 1,682 1,441 4.2 2,317 (12.6) 4,343 4,101 7.0 (952) (2.0) (1,885) (1,770) 1.8 1,365 (19.9) 2,458 2,331 (17.1) (223) (61.4) (309) (248) 5.6 27 40.7 65 75 3.9 1,169 (10.6) 2,214 2,158 8.0 (167) (7.5) (321) (313) 14 15 15 7.0 (52) 7.0 (108) (102) 3.0 950 (12.2) 1,785 1,743 3.0 950 (12.2) 1,785 1,743 0.4 155 (13.1) 144 146 1.0 156 (13.1) 145 143 yoy % chg 0.0 16.7 5.9 6.5 5.4 24.7 (13.3) 2.6 2.7 0.1 5.5 2.4 2.4 (1.7) 1.2

SOURCE: CIMB RESEARCH, COMPANY

Expectations for OCBC (results on 2nd August)

We expect OCBCs 2Q13 net profit (CIMB: S$666m vs. consensus S$652m) to retreat sequentially the least (-4% qoq) among the three banks, mainly because its 1Q13 results were not as hyped-up. The key positive in its 1Q results was its wealth management fees powering up; we are cautious if this can be repeated in 2Q as equity sentiments soured late in the quarter. Insurance, which has been a strong earnings contributor for 2012, could see its current 2013 earnings contract as long-bond yields rise and non-par gains, accounting-driven gains enjoyed in 2012 reverse. Trading-related income should be relatively weak also, like peers. We believe that all three banks will report a relatively weak trading quarter. Benefits from wider NIMs will only start to show up later in the year, when treasury teams decide to take advantage of gapping opportunities from the steeper yield curve, once interest rates stabilise. Key issues investors will look out for include: 1) whether guidance of margins bottoming is in sight, since management was relatively more bearish on margin guidance previously; and 2) if there are more concrete plans on its Indonesian and China expansion strategy. On margins, we suspect that OCBC will continue to see margin contraction in 2Q. On regional opportunities, both Indonesia and China have issues currently. China has seen its PMI plunge to an 11-month low today and employment at its weakest in four years - data clearly reflects a broad slowdown is underway. Indonesia has seen a current account deficit come up as its commodity exports slow. Its CPI has headed up after the recent fuel subsidies cut. GDP growth expectations have been cut. Broadly speaking, the slowdown in China and ASEAN does not bode well for the Singapore banks, not
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just OCBC - we will be watchful on further economic data deterioration. Our target price for OCBC (Underperform) is s$10.17, based on 1.36x CY13 P/BV (ROE: 11.1%, COE 9.6%, g: 4.5%).
OCBCs 2Q expectations : S$666m
Figure 11: OCBCs 2Q13 results expectations
FYE Dec (S$ m) Net interest income Non-interest income Total income Overhead expenses Pre-provision profit Loan loss provisions Exceptionals Associates' contrib Pretax profit Tax Tax rate (%) Minority interests Net profit Core net profit EPS (cts) Core EPS (cts) 2QFY13 2QFY12 916 727 1,644 (700) 944 (83) (16) 5 850 (137) 16 (47) 666 666 19.2 19.4 931 596 1,527 (661) 866 (38) (15) 12 825 (138) 17 (39) 648 648 (1) 19 yoy % 1QFY13 qoq % 2QFY13 2QFY12 chg chg Cum Cum (1.6) 912 0.5 1,828 1,882 22.1 676 7.6 1,403 1,442 7.6 1,588 3.5 3,232 3,324 5.9 (672) 4.2 (1,372) (1,286) 9.0 916 3.0 1,860 2,038 118.4 (21) 295.2 (104) (134) (14) (30) (30) (58.3) 13 (61.5) 18 18 3.0 894 (5.0) 1,744 1,892 (0.7) (142) (3.5) (279) (309) 16 16 16 20.3 (56) (16.3) (103) (103) 2.7 696 (4.3) 1,362 1,480 2.7 696 (4.3) 1,362 1,438 3,855.2 20 (4.4) 78.4 42 2.8 20 (4.3) 79.2 42 yoy % chg (2.9) (2.7) (2.8) 6.7 (8.7) (22.4) (7.8) (9.7) (2.0) (0.1) (8.0) (5.3) 87.9 89.3

SOURCE: CIMB RESEARCH, COMPANY

Expectations for UOB (results on 1st August)

We expect UOB to report a 2Q13 net profit of S$660m (-9% qoq) vs. consensus expectations of S$700m. Earlier in UOBs 1Q results season, its key positive was non-interest income, particularly loan fees, fund management and IB fees. IB fees was helmed by the closing of the Thai Bev-F&N deal in 1Q, so one should not expect quarterly IB fees to stay at above-S$100m quarterly run-rate. This is a reason for our expectations of lower non-interest income sequentially. Outside of IB fees, we are quite encouraged by the broad-based fee growth for UOB in recent quarters, with loan fees (UOBs strength in business banking and regional flow activity), wealth management fees (from bancassurance tie-up with Prudential, treasury centres initiative in Malaysia) all being fairly stable and growing. We believe that UOBs margins should start to flatten out by the end of the year. Guidance post-1Q was that its 6bp margin decline in 1Q was not due to mortgages but the presence of chunky, low-margin bridging loans; we do not think there will be any improvements in NIMs in 2Q just yet but we think the likely exit of this bridging loan in 3Q could help boost margins a little. (F&N paid out special dividends from its APB sale in Jul 2013).
UOBs 2Q expectations: S$660m
Figure 12: UOBs 2Q13 results expectations
FYE Dec (S$ m) Net interest income Non-interest income Total income Overhead expenses Pre-provision profit Loan loss provisions Exceptionals Associates' contrib Pretax profit Tax Tax rate (%) Minority interests Net profit Core net profit EPS (cts) Core EPS (cts) 2QFY13 2QFY12 965 630 1,595 (693) 903 (111) 20 812 (149) 18 (4) 660 660 42 42 981 629 1,610 (666) 945 (105) (2) 31 869 (151) 17 (5) 713 713 180 181 yoy % 1QFY13 chg (1.7) 964 0.2 708 (0.9) 1,672 4.1 (696) (4.4) 976 6.0 (130) (34.1) 24 (6.5) 870 (1.4) (143) 16 (27.6) (5) (7.5) 722 (7.5) 722 (76.9) 46 (76.9) 46 qoq % 2QFY13 2QFY12 yoy % chg Cum Cum chg 0.1 1,928 1,980 (2.6) (11.0) 1,339 1,259 6.3 (4.6) 3,267 3,239 0.9 (0.5) (1,389) (1,341) 3.5 (7.5) 1,879 1,898 (1.0) (14.8) (241) (208) 15.7 (5) (14.8) 44 49 (9.3) (6.7) 1,682 1,734 (3.0) 4.0 (292) (323) (9.7) 17 19 (6.9) (21.8) (9) (10) (9.1) (8.7) 1,382 1,401 (1.4) (8.7) 1,382 1,401 (1.4) (8.7) 174 176 (1.4) (8.7) 176 178 (1.4)
SOURCE: CIMB RESEARCH, COMPANY

Key issues investors will likely look out for are the performance of its non-Singapore operations. UOB and OCBC are proxies to ASEAN growth; this was a positive last year but we sense that investors are getting noticeably more
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concerned with having an ASEAN exposure, when Indonesia and Thailand are clearly slowing down. We have highlighted Indonesias issues earlier. For Thailand, the Bank of Thailand trimmed its GDP growth forecast last week, with export and import growth coming down quite sharply and domestic consumption showing signs of slowing down after the government wound down its stimulus measures last quarter. UOB has highlighted that its UOB Thailand business has picked up noticeably in the past year, as its systems integration and headcount additions bear fruit. Investors will be keen to hear if its optimism in Thailand is still unchanged as the country slows down. Our target price for UOB (Neutral) remains at S$21.24, based on 1.35x CY13 P/BV (ROE: 11.3%, COE: 9.5%, g: 4.2%)

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or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates. United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (CIMB UK). CIMB UK is authorised and regulated by the Financial Services Authority and its registered office is at 27 Knightsbridge, London, SW1X 7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the Order); (c) are persons falling within Article 49 (2) (a) to (d) (high net worth companies, unincorporated associations etc) of the Order; (d) are outside the United Kingdom; or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being refe rred to as relevant persons). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent "investment research" under the applicable rules of the Financial Services Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (Australia) Limited, CIMB Securities (India) Private Limited,and is distributed solely to persons who qualify as "U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Distribution of stock ratings and investment banking clients for quarter ended on 30 June 2013 1077 companies under coverage Rating Distribution (%) Outperform/Buy/Trading Buy Neutral Underperform/Sell/Trading Sell 52.5% 33.6% 14.0% Investment Banking clients (%) 7.4% 4.7% 5.5%

Recommendation Framework #1 * Stock Sector OUTPERFORM: The stock's total return is expected to exceed a relevant OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected benchmark's total return. to perform in line with the relevant primary market index over the next 12 months. UNDERPERFORM: The stock's total return is expected to be below a relevant UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to underperform the relevant primary market index over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant TRADING BUY: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to outperform the relevant primary market index over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant TRADING SELL: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to underperform the relevant primary market index over the next 3 months. * This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
Recommendation Framework #2 ** Stock Sector OUTPERFORM: Expected positive total returns of 10% or more over the next 12 OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of +10% or better over the next 12 months. NEUTRAL: Expected total returns of between -10% and +10% over the next 12 NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) months. an equal number of stocks that are expected to have total returns of +10% (or better) or -10% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +10% to -10%; both over the next 12 months. UNDERPERFORM: Expected negative total returns of 10% or more over the next 12 UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of -10% or worse over the next 12 months. TRADING BUY: Expected positive total returns of 10% or more over the next 3 TRADING BUY: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of +10% or better over the next 3 months. TRADING SELL: Expected negative total returns of 10% or more over the next 3 TRADING SELL: The industry, as defined by the analyst's coverage universe, has a months. high number of stocks that are expected to have total returns of -10% or worse over the next 3 months. ** This framework only applies to stocks listed on the Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

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Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2012. AAV not available, ADVANC - Excellent, AEONTS Good, AMATA - Very Good, ANAN not available, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCH not available, BCP - Excellent, BEC - Very Good, BGH - not available, BJC Very Good, BH - Very Good, BIGC - Very Good, BTS - Excellent, CCET Good, CENTEL Very Good, CK - Very Good, CPALL - Very Good, CPF - Very Good, CPN - Excellent, DELTA - Very Good, DTAC - Very Good, EGCO Excellent, ERW Excellent, GLOBAL - Good, GLOW - Very Good, GRAMMY Excellent, HANA - Very Good, HEMRAJ - Excellent, HMPRO - Very Good, INTUCH Very Good, ITD Very Good, IVL - Very Good, JAS Very Good, KAMART not available, KBANK - Excellent, KK Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR - Good, MAKRO Very Good, MCOT - Excellent, MINT - Very Good, PS - Excellent, PSL - Excellent, PTT - Excellent, PTTGC - Excellent, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, RS Excellent, SAMART Excellent, SC Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI - Good, SPALI - Very Good, SRICHA not available, SSI not available, STA - Good, STEC - Very Good, TCAP - Very Good, THAI - Excellent, THCOM Very Good, TICON Very Good, TISCO - Excellent, TMB Excellent, TOP - Excellent, TRUE - Very Good, TTW Very Good, TUF - Very Good, VGI not available, WORK Good.

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