Singapore Banks:Retail franchise mispriced vs. HK Banks? Buy UOB, Sell HSB

Deutsche Bank Markets Research Asia Hong Kong Banking / Finance Banks Industry Singapore Banks Date 8 January 2018 Recommendation Change Retail franchise mispriced vs. HK Banks? Buy UOB, Sell HSB Factoring in their retail capabilities ________________________________________________________________________________________________________________Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Franco Lam Research Analyst (+852 ) 2203 6226 franco.lam@db.com Joshua Lee, CFA Research Analyst (+65 ) 6423 5723 joshua.lee@db.com Key Changes Company Target Price Rating DBSM.SI 23.50 to 27.10(SGD) - OCBC.SI 12.30 to 13.60(SGD) - UOBH.SI 25.50 to 30.60(SGD) Hold to Buy 2388.HK 37.50 to 38.00(HKD) - 0011.HK 158.00 to 169.00(HKD) Hold to Sell 0023.HK 25.00 to 25.50(HKD) - 2356.HK 19.00 to 20.50(HKD) - 0440.HK 66.50 to 67.00(HKD) - Source: Deutsche Bank Companies Featured DBS Group Holdings Ltd (DBSM.SI),SGD26.50 Hold 2016A 2017E 2018E P/E (x) 9.2 15.4 12.8 Div yield (%) 3.9 2.5 2.6 Price/book (x) 1.0 1.5 1.4 United Overseas Bank (UOBH.SI),SGD27.02 Buy 2016A 2017E 2018E P/E (x) 9.9 13.2 11.5 Div yield (%) 3.8 2.6 2.8 Price/book (x) 1.0 1.2 1.2 BOC Hong Kong Holdings (2388.HK),HKD39.55 Sell 2016A 2017E 2018E P/E (x) 4.7 12.8 13.3 Div yield (%) 7.7 3.5 3.6 Price/book (x) 1.3 1.7 1.6 Hang Seng Bank (0011.HK),HKD193.60 Sell 2016A 2017E 2018E P/E (x) 16.1 19.2 18.7 Div yield (%) 4.5 3.5 3.7 Price/book (x) 2.1 2.6 2.5 Source: Deutsche Bank Upside risk: Better-than-expected margin expansion from higher rates. Downside risk: Worse-than-expected asset deterioration from O&G and SME in a higher rates environment.2017 was a banner year for SG banks, with the sector share price performance third best among Asian financials. While the sector is currently one of the few in the region to have P/B of 1.4x trade above the 10-yr avg, SG banks do not look expensive to us. While higher rates and stable asset quality will be key catalysts, they also deserve to trade at a higher multiple as their improving retail banking capabilities that are currently mispriced by the market should be recognized. Factoring these into our valuation matrix, SG banks continue to look relatively attractive; with UOB the most undervalued, we upgrade it to Buy, and downgrade HSB to Sell on expensive valuation. Retail-focused banks and their premium valuation History shows that the market is willing to pay a higher trading multiple for retail-focused banks. We have identified a list of quality banks in the region where their current P/B trading multiples are on average double that of the rest of the sector and their RoE differentials about 200bp higher. These banks have consistently outperformed their corporate counterparts and did so again in 2017 by 12%. Heading into 2018, while the impact of higher rates should matter to USD-driven developed market banks such as HK and SG, what differentiates SG banks from the rest is their increased focus on the wealth management/retail banking business. Given the growing affluent population in the region, this segment has been one of the fastest growing in recent years. Also, between HK and SG, both considered to be the private banking centers of Asia, SG banks are seen as early successes in this space. HK vs. SG banks: the rise of private/consumer banking for Singapore banks HK and SG share many similarities, one of them being beneficiaries of rising wealth in their economies. However, there is a divergent trend – while investors are pricing in potential benefits of higher rates for both markets, it has yet to award SG banks for: (1) their resurgence in retail operations and (2) for going back to their domestic market. We also believe the market is overvaluing the HK banking sector in their (3) stronger loan growth demand for BoCHK, which is mostly from the lower quality corporate sector, and (4) HSB’s retail banking capabilities, which have been slowing vs. those of SG banks. In fact, since the financial crisis in 2008, the proportion of assets from retail banking has been growing at a faster pace for SG banks at a 12% CAGR, while HK banks have lagged behind at 7%. Valuing HK & SG banking sectors in business mix: SG banks more attractive Both HK and Singapore markets should remain the key private banking centers of Asia in the long run as the banks will benefit from rising wealth fr