The current global meltdown is created none other than financial/investment banks in over leveraging, creating high risk and sophisticated structured investment products and retailed them globally. One failed will trigger a domino effect to the rest and eventually crippled the whole financial system. The sub-prime failure has so far caused banks around the globe to get hit. Some need capital injection to survive, some need to be acquired and the unlucky one like Lehman Brothers ended up declared bankrupt. With the fate of Lehman Brothers' fate sealed, it further triggered financial impact with its structured investment products, the minibonds. Even though the 3 local banks ( DBS, UOB and OCBC ) have minimum exposure to the CDO as compared to their peers in Europe and America, DBS is now facing the Lehman Brothers' minibonds and its high notes 5 issue. Furthermore, as Singapore economy enters a technical recession, a possible recession next year if job-cut and salary-cut start to kick in, the 3 local banks will be facing with slow loan growth looking ahead. With the write-down from their CDO exposure taken care of, the net cashflow of the 3 local banks still look pretty strong at the moment. Moreover, they recently managed to raise capital with their preferential share placement and this further enhanced their cashflow position. With slow loan growth and recession in mind, the earnings of the 3 banks for year 2009 will have to be projected down. As such whatever valuation at present deems cheap might be potentially be the fair value for FY2009 if the projection is adjusted down. The other concern is whether will there be any further structured investment products like the Lehman Brothers' minibonds need to be unwind. Below is the valuation of the 3 banks in last 10 years during the bear market scenarios :-
DBS :-
current valuation = 0.98x P/B of FY07 ( Price = $13.00 as of 17th Oct 08, FY07 Book Value = $13.20 )
SARS (02/03 ) = 0.8x P/B
dot.com bubble & 911 ( 01 ) = 1x P/B
asian crisis ( 97/99 ) = 0.4x P/B
UOB :-
current valuation = 1.3x P/B of FY07 ( Price = $14.76 as of 17th Oct 08, FY 07 Book Value = $11.37 )
SARS ( 02/03 ) = 1.12x P/B
dot.com bubble & 911 ( 01 ) = 1.13x P/B
asian crisis ( 97/99 ) = 0.48x P/B
OCBC :-
current valuation = 1.22x P/B of FY07 ( Price = $6.10 as of 17th Oct 08, FY 07 Book Value = $5.01 )
SARS ( 02/03 ) = 1.03x P/B
dot.com bubble & 911 ( 01 ) = 1.24x P/B
asian crisis ( 97/99 ) = 0.5x P/B
Typically, the valuation for the 3 banks could drop to around 1x P/B ( reference FY09, FY09 will have to projected down due to slower in loan growth ) and the worst case is fall till the valuation during the 1997-1999 Asian financial crisis period.
When the country's economy and equity market recover, the bank stocks will be the first to recover. Investors will a 3-5 year time frame could consider investing into the bank stocks when their prices fall into a very attractive price.
