ASEAN Financials | September 9, 2015

MORGAN STANLEY RESEARCH MORGAN STANLEY ASIA (SINGAPORE) PTE.+

September 9, 2015

Nick Lord

ASEAN Financials

[email protected]

+65 6834-6746

Edward Goh, CFA

Singapore banks – Rate rises, the good and the bad We align our rates estimates with the global banks team. An assessment of where credit risks lie leads us to lower PTs by 1.9%5.9%. but we still see 26-28% upside. DBS and OCBC preferred.

[email protected]

ASEAN Financials Asia Pacific IndustryView

What's Changed? ASEAN Financials DBSM.SI OCBC.SI UOBH.SI

From:

To:

S$23.27 S$11.67 S$24.69

S$21.92 S$11.30 S$24.24

+65 6834-8975

In-Line

Our global banks team have published a Global Insight report in which we align the rates inputs in our earnings estimate s. We now set a base case assuming rates rise according to the Fed futures curve, and as a result have made minor changes to our base case EPS estimates. We also reset our bull, base and bear case scenarios and lower PTs by 1.9%-5.9%. Singapore banks remain the best positioned in ASEAN for our base case rate environment: We see 26-28% upside. Our preference is based on NIM benefits and the risks rising US rates present for the more emerging sectors in ASEAN. We are now also able to place Singapore banks in a global context as regards rate increases. In our view, Asian rate-sensitive banks benefit relative to global banks in the 'Goldilocks scenario' of the current Fed funds future curve. However, if rates rise too quickly, this would create credit risk relative to global peers. Were rates to rise more slowly than currently forecast, that would probably provide a boost for more emerging ASEAN banks. Focusing on the bear case: In our view, Singapore banks would see significant upside in the event of rates rising in line with our base case. However, given current uncertainties, share prices are suggesting we see something between this and our bear case. This report therefore explores the risks. Our analysis of current 'hot topics' suggests that the biggest risk to Singapore loan books is their US$ exposure to the commodities sector, especially loans booked out of Singapore, Malaysia and Indonesia, rather than their exposures to China. In this case, all the banks have c.6-12% of loans in risk areas. Our bear case suggests 60-90bps loan loss charge in both 2016e and 2017e and is weighted at 20% in our price targets. Current share prices suggests a more aggressive 62%-67% weighting. DBS and OCBC remain preferred: We see upside potential for all the Singapore banks and similar near-term risks for OCBC and UOB, although we also see more upside for OCBC if it is successful in driving its wealth strategy. DBS is less exposed to credit risk than widely assumed, in our view, and benefits more from rising rates. We remain less convinced on UOB's long-term growth prospects relative to peers and retain an EW.

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. + = An alysts emp lo yed b y n o n -U .S. affiliates are n o t registered w ith FINRA, may n o t b e asso ciated p erso n s o f th e memb er an d may n o t b e su b ject to NASD/NYSE restrictio n s o n co mmu n icatio n s w ith a su b ject co mp an y, p u b lic ap p earan ces an d tradin g secu rities h eld b y a research an alyst acco u n t.

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Aligning Global Rates Inputs Our global banks report looks at the winners and losers assuming three different rates scenarios - the curve implied by the fed funds futures (base case), the curve implied by the mean of the Fed's own assumptions (bull case), the curve assuming only 50% of the increases implied by the fed fund futures occurs (the bear case) - see (attach link to Global Rates report ) for more detail. In addition, we have forecast what would happen to the 3M SIBOR under these different scenarios. In all scenarios, we assume the gap between SIBOR and the Fed Funds rates closes to c. 40bps by the end of 2017. Under the base case used by our banks team, Dec 2016 SIBOR would be 116bps and end 2017 SIBOR would be 177bps. We base our forecasts around this rate forecast, note this is different from the forecasts of our ASEAN economist, Deyi Tan, who forecasts 190bps at end 2016 and 238bps at end 2017, however it does make our forecasts consistent with the rest of the global banks team. Exhibit 1: Fed Funds Rates - Bull, base and bear case

Exhibit 2: SIBOR - Bull, base and bear case

Source: CME Group, Federal Reserve, Morgan Stanley Research Source: CME Group, Federal Reserve, Morgan Stanley Research

In the exhibit below, we show what would happen to NIM for each of the Singapore banks based upon the different rate scenarios used by our global banks team. Exhibit 3: Singapore Bank NIM forecasts under different assumptions

So u rce: Co mp an y Rep o rts, Mo rgan Stan ley Research , e= Mo rgan Stan ley Research estimates

We now build the base case rate scenario into our base case forecasts for the Singapore banks. We have increased our top-line forecasts modestly to reflect this (see Exhibit 4to Exhibit 6). However, we have not made material adjustments to our earnings estimates as: 1. Some of this benefit is expected to be offset by continued slow loan growth. 2

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2. We have raised cost forecasts, as we believe that Singapore banks will use part of any rate benefit to invest in IT and to otherwise upgrade their businesses to drive organic regional expansion (for more detail on the Singapore bank's regional ambitions, please see our recent Asia Insight - Singapore Banks, Beyond Rates: OCBC the biggest beneficiary, dated July 2, 2015). 3. We have increased loan loss charge estimates for all banks in 2016e and for OCBC in 2017e. Exhibit 4: DBS - Earnings estimate revisions

So u rce: Mo rgan Stan ley Research estimates

Exhibit 5: OCBC - Earnings estimate revisions

So u rce: Mo rgan Stan ley Research estimates

Exhibit 6: UOB - Earnings estimate revisions

So u rce: Mo rgan Stan ley Research estimates

Revising the bull, base and bear case for Singapore banks One of the concerns we have for Asian rate sensitive banks relative to global peers is that a more rapid rise in

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rates than the base case is not necessarily a benefit. This is partly because of the recent rapid expansion in leverage, especially linked to the property market but also due to the risk to ASEAN currencies, and portfolio flows that could arise if the US$ appreciates sharply alongside US interest rates. A lot is going to depend on the context of rate rises for the Singapore banks. To take this into account, we have revised our bull, base and bear cases as follows. Bull case - in our bull case, we assume not only the maximum NIM benefit from our global bull case rate estimate, but also that loan growth prospects are not negatively affected vs. our base case. Whilst we assume some higher credit charges than under our base case, as a more rapid increase in rates will result in some dislocation, we do not see a widespread credit problem as we assume global growth helps the export sector of ASEAN economies. This scenario has to assume that rising US$ rates are driven by a strong US economy, and a European recovery such that ASEAN countries see their export sectors revive. We assume only a 5% probability for this scenario. Base case - we assume that rate rises follow the curve implied by the fed futures, which benefits NIM. We expect loan growth will remain subdued and credit charges will rise slowly and modestly. We apply a 75% probability to this scenario. Exhibit 7: Singapore banks base case loan loss forecast compared to history

So u rce: Co mp an y rep o rts, Mo rgan Stan ley Research , e= Mo rgan Stan ley Research estimates

Bear case - Similar to our bull case, in our bear case we also assume that rates increase at the pace implied by the fed funds dot plot (this is different from the bear case used in our global interest rate report, where the bear case assumes a rate rise at half the rate implied by the Fed funds rate, this would actually be quite benign for the Singapore banks). In our bear case, we would initially see a benefit to NIM, but we assume that the dislocation that results from this more aggressive rate scenario causes a rise in loan loss charges, more than offsetting the benefit of rising NIM. In turn, we assume that the rise in NIM is then also curtailed, because increased NPLs begin to act as a drag on NIM. We see similar loan growth to our base case. In this environment, earnings would be c.14-29% below our base case assumptions. We assign a 20% probability to our bear case.

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Exhibit 8: Singapore banks bear case loan loss forecast compared to history

So u rce: Co mp an y rep o rts, Mo rgan Stan ley Research , e= Mo rgan Stan ley Research estimates

Weighing up credit losses against NIM gains As a final point, we assess the extent to which credit quality deterioration could offset the benefits from raising rates. In the tables below, we show for each bank the change in PBT given various NIM and loan loss scenarios. We show a range of NIM scenarios along the top, and loan loss charge scenarios across the bottom. The boxed areas show our current forecast for both. The areas shaded in green would imply an upgrade to current forecasts. The areas in red a downgrade. The blue NIM column is our bull case NIM. The table show us a number of things, namely DBS and OCBC's greater sensitivity to rising NIM, and at what level of loan losses we would begin to see downgrades, we use this in particular to assess whether or not the higher rates factored into our 'bull' case rates forecast would result in earnings upgrades, or downgrades. Very simply the 'bull' case rate scenario would be good for DBS so long as the loan loss charge remains below 45bps. For OCBC it would be good so long as the loan loss charge peaks at c.30bps, and would be good for UOB as long as the loan loss charge remains below 40bps. In Exhibit 7 and Exhibit 8 above, we show that these would not be high relative to history, and therefore believe that a rate outcome similar to the Fed's dot chart would be negative for Singapore banks.

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Exhibit 9: DBS - Impact on 2016e PBT under different NIM and loan loss scenarios

So u rce: Mo rgan Stan ley Research estimates

Exhibit 10: OCBC - Impact on 2016e PBT under different NIM and loan loss scenarios

So u rce: Mo rgan Stan ley Research estimates

Exhibit 11: UOB - Impact on 2016e PBT under different NIM and loan loss scenarios

So u rce: Mo rgan Stan ley Research estimates

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Where is the credit risk likely to be in our bear case scenario? In our view, Singapore banks are well balanced and well managed institutions; they also have a strong regulator. This is one of the reasons we have maintained a relative OW on both DBS and OCBC throughout the year. Notwithstanding this, the banks are constantly subject to investor questions over balance sheet health. Below, we discuss some of the more topical concerns. Our conclusion is that it would seem prudent to provide for some deterioration in the Oil and Gas books, and in the bear case to make some provision against Singapore mortgages. However, China exposures are likely to do better than currently feared. In the exhibit below, we show what we have effectively priced into our commodity loan books as a proxy for this risk in the base case. Alternatively, we show what we have effectively put in the China book. Finally, we show what we have included in these books under our bear case, if we also assume S$300m of Singapore mortgage losses. Exhibit 12: Putting the Risk in context

So u rce: Co mp an y data, Th o mso n Datastream, Mo rgan Stan ley Research , e= Mo rgan Stan ley Research estimates

US$ lending One of the main macro trends that is likely to persist over the coming years is the appreciation of the US$. All three of the Singapore banks have exposure to US$ lending, with 16.6% to 31.6% of their loan books in US$ and, with the exception of UOB, exposure to US$ loans has expanded materially since 2008. Investors are concerned over the sustainability of this debt in the event of a sharp and disorderly appreciation of the US$.

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Exhibit 13: US$ loans as a % of Singapore Bank Loan books

So u rce: Co mp an y Date, Mo rgan Stan ley Research

The most notable moves YTD in ASEAN national currencies where Singapore banks may have US$ exposures are Malaysia (-16% ytd) and Indonesia (-11% ytd). The S$ is down 7%, and the CNY down just 3%. In Exhibit 14 below, we show where we believe the geographic concentration of US$ risk is for each of the Singapore banks. DBS has the greatest exposure to Greater China at c.50% of US$ loans (c.16% of total loans) compared to 36% of US$ loans for OCBC (9% total loans) and c.31% at UOB (5% total loans). A large part of the DBS differential will be trade finance. DBS also has the greatest exposure of US$ loans to other Southeast Asian countries and India (c.8%in our view), but is closely followed by OCBC with c.7% of its total loan book being US$ loans to Indonesian, or Malaysian companies. UOB has a 4.3% exposure. In this context, we would also note that US$ exposures have begin to fall at DBS and OCBC in particular in 1H15 as trade finance balances have begun to ease. Exhibit 14: Singapore banks US$ Loan Split

So u rce: Co mp an y Rep o rts, Mo rgan Stan ley Research

Linked to this, we also get questions about Singapore banks greater China exposure. In Exhibit 15 below, we also break this down in more detail.

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Exhibit 15: Singapore Banks China Exposure

So u rce: Co mp an y Rep o rts, Mo rgan Stan ley Research

Deflation and the Singapore mortgage market Another concern investors have about credit risk is in the Singapore housing market. With the exception of UOB which has had some issues in the high end market, thus far Singapore banks have experienced low levels of credit risk in the housing market. Exhibit 16: Singapore Banks Mortgage NPL ratios are at all time low, except for slight uptick for UOB

Exhibit 17: Deflationary pressure is seen in the past one year

Source: CEIC, Morgan Stanley Research Source: Company data

Concerns over the housing market stem both from the rapid pace of house price appreciation since 2006, and the associated rapid increase in mortgage borrowing. As a result, household debt as a % of GDP is similar to 1997 levels. The concerns focus on the fact that as interest rates rise, affordability gets worse, the effect of this could be exacerbated in a deflationary environment (see Exhibit 17), especially if this results in a fall in collateral values. Even if we do not get a wave of defaults, we could see an impact of formula driven loan loss charges, and on model driven RWAs. By way of partial mitigation, we note house prices have now been falling for over a year, and real wage growth has improved.

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Exhibit 18: Sharp rise in property prices observed prior to the implementation of cooling measures

Exhibit 19: Real Wage has been declining since the 2008 crisis though starting to improve over the past year

Source: CEIC, Morgan Stanley Research Source:CEIC, Morgan Stanley Research

Default Risk The main concern for Singapore banks and the mortgage market, despite the recent tailing off of house prices, plus improvements in real servicing ability is the level of indebtedness that has built up as a result of the recent housing boom. Personal debt has continued to build up over the last two years and is similar to the levels we saw in 1997, but with much lower rates today. Offsetting this, there has been an increase in personal assets (in fact currency and deposits alone are larger than mortgage debt) which should mitigate against systemwide issues, nonetheless the build up of assets and liabilities may have been uneven, resulting in some defaults if we get a combination of house price falls, a rapid rise in rates and a material slowdown in GDP growth. Exhibit 20: Household Debt to GDP and 3M SIBOR

So u rce: Sin gStat, Datastream, Mo rgan Stan ley Research

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Exhibit 21: Currency and Deposits are larger than mortgage debt

So u rce: Sin gStat, Datastream, Mo rgan Stan ley Research

In previous research (Asia Insight: Inflection Point, 9th September 2013), we highlighted that there are two possible groups at risk when rates begin to rise, especially if property prices fall - those with high debt servicing ratios and those with high LTVs. MAS estimated in 2012 that 5%-10% of borrowers have probably over leveraged on their property purchases, which could increase to 10-15% if mortgage rates were to rise by 3 percentage points. Alternatively, in its 2012 Financial Stability review, MAS calculated that just under 5% of mortgages had an LTV of over 80% – suggesting c.S$10bn of mortgage debt at risk, in our view. We assume a 20% loss rate on this and build in c.S$300m of losses for each of the banks we cover over the next three years; we believe that this is conservative, especially as measures have come in to correct DSR over the last three years.

RWA risk Finally, we note that there is a risk that RWAs could move up on the mortgage book if loan defaults increase. Alternatively regulatory changes under Basel IV could also result in an increase in mortgage risk weightings. We believe that an increase in mortgage risk weights to c.28% would take 60-70bps off Singapore bank CET1.

Malaysia For OCBC and UOB we estimate 11% and 12% respectively of the loan book is in Malaysian Ringgit, and 13% of exposures are deemed to be from Malaysia. In Exhibit 22 we show the breakdown of the Malaysian loan books of the two banks and in Exhibit 23, we show recent growth rates. OCBC has expanded the most over the last three years, whilst UOB has been slowing property lending in particular. The trends in NPL performance have been similar, with UOB better covered than OCBC.

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Exhibit 22: OCBC and UOB Malaysia Exposure

So u rce: Co mp an y Data, Mo rgan Stan ley Research

Exhibit 23: Recent Loan Growth in Malaysia

So u rce: Co mp an y Data, Mo rgan Stan ley Research

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Exhibit 24: Historical NPL performance vs. Peers

Source: Company data, Morgan Stanley Research

Exhibit 25: Provision Coverage vs. Peers

Source: Company data, Morgan Stanley Research

Commodities exposure As commodity prices continue to fall (at least in US$ terms) investors have become concerned about any commodities exposure the Singapore banks may have. In our view, coal exposures should not be a major issue. The proactive nature of Singapore bank provisioning means that any major exposures that were likely to go wrong will have already been recognised. For Singapore banks, the major issue is likely to be exposure to the oil and gas services sector, especially as low oil prices put further exploration on hold. In fact OCBC has already provided for a potential cash flow impairment on some exploration vessels as if marks to market new chartering rates - this was one of the main provisions made in the 2Q15 results. In the exhibit below, we show the disclosed Oil and Gas exposures of the Singapore banks. UOB has the largest exposure of the three, although all the banks have similar exposures. Exhibit 26: Singapore Banks oil and gas exposure

Exhibit 27: Total commodities exposure compared with other Asian banks

Source: Company Data, Morgan Stanley Research *UOB off balance sheet exposure is an MS Estimate .

Source: Company data, Morgan Stanley Research

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Valuation Relative to history, Singapore banks appear to offer value. In the exhibits below, we show price/earnings and price to book relative to history. Whilst DBS is trading close to long-term average price to book ratios, and is only 1 S.D. below long-term PE ratios, OCBC and UOB in particular are trading close to historical lows (on a PER basis for OCBC and PB basis for UOB). Dividend yield for all the Singapore banks is also above historical averages. Exhibit 28: DBS is trading close to its historical P/B mean

Source: Datastream, Morgan Stanley Research

Exhibit 30: OCBC is trading slightly below its 1STD historical P/B

Source: Datastream, Morgan Stanley Research

Exhibit 32: UOB is trading close to its -2STD historical P/B

Source: Datastream, Morgan Stanley Research

Exhibit 29: DBS is trading close to its -1STD historical forward PER

Source: Datastream, Morgan Stanley Research

Exhibit 31: OCBC is trading within its -2STD historical forward PER

Source: Datastream, Morgan Stanley Research

Exhibit 33: UOB is trading within its -2STD historical forward PER

Source: Datastream, Morgan Stanley Research 14

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Exhibit 34: Singapore banks consensus 1yr fwd dividend yield is higher than their historical average level

So u rce: Th o mso n O n e, Mo rgan Stan ley Research

In section 1 of this report, we discussed our new bull, base and bear scenarios. Below, we show how these drive valuations. All banks offer c.36-37% upside to our base case valuation and (26% to 28% to our probability weighted target price). UOB offers the least downside to our bear case, but also the least upside, whereas OCBC offers the most upside to our bull and is only mid pack in terms of downside to bear case valuation. Exhibit 35: Current Price relative to Bear, Base and Bull case valuations

So u rce: Th o mso n Reu ters, Mo rgan Stan ley Research

The OCBC leverage discount In a recent note (Asia banks - Assessing Margin of Safety, 25th August 2015), our Asian banks analyst, Anil Agarwal, highlighted which Asian banks had a cushion, and which did not. OCBC turned out to be the weakest Singapore bank. We have discussed throughout this year, OCBC's leverage discount, and our view that it has the potential to erode as capital ratios increase. However, there is also a risk that this differential may take longer to close, or may not close at all if credit charges and/or RWAs increase. In addition, as stock prices fall, the more the discount widens, as the amount of theoretical equity the banks would need to raise to fill the gap would increase. At the moment, we estimate the leverage gap to be 7% dilutive. This is probably already reflected in the share price, with OCBC's leverage adjusted PER between those of DBS and UOB.

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Exhibit 36: Singapore Banks 2015e PER on a leverage adjusted basis

So u rce: Co mp an y Rep o rts, Mo rgan Stan ley Research

Singapore banks' performance vs. ASEAN banks in a rising rate environment The bulk of this report is about the impact of differing rate scenarios on the Singapore banks, however our recommendations of the Singapore banks are relative to other, emerging markets ASEAN banks. Whilst an aggressive rise in US rates is bad for the Singapore banks, it is worse for banks in Indonesia, Malaysia and Thailand. Even the more modest rise implied by the current fed funds futures curves will cause problems for these banks. Hence in the bull and base case rate scenarios discussed in the global banks interest rate report, we would expect Singapore banks to outperform peers. In the event of a lower rise in US rates, the pressures on the more emerging banks ease. Exhibit 37: Singapore banks, implied by the MSCI index, are the least correlated to the interest rates movement as compared to its regional peers

So u rce: Datastream, Mo rgan Stan ley Research

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Risk-Reward – DBS Main beneficiary of rising rates Investment Thesis Rising rates create the potential for DBS's NIM and RoE to improve. Valuation does not fully reflect this, in our view. Risks to top-line growth from weaker wealth and trade finance. In addition risk of increased credit charges, but reflected in the price. With the prospect of rising rates getting closer and organic reforms continuing to yield results, we see scope for a re-rating, especially if there is no material deterioration in credit charges.

Key Value Drivers

So u rce: Th o mso n Datastream, Mo rgan Stan ley Research estimates

Price Target S$21.92

We derive our price target by probability-weighting our bull, bear and base cases at 5%, 20%, and 75%, respectively.

Bull

Stronger global growth: Global growth exceeds market expectations, driving faster Singapore growth and capital markets revenues. Higher interest rates result in higher NIMs.

S$30.76

15.3x Bull Case 16e EPS

Base

S$23.71

12.6x Base Case 16e EPS

Bear

S$12.98

10.0x Bear Case 16e EPS

Slow global growth: Singapore GDP of 2.3% for 2015. Group loan growth slows, but NIMs start to rise. Modest deterioration in credit quality. Weak global growth: Slower loan growth, NIMs flat, weaker capital market revenues, credit quality deteriorates and 2016e loan loss charge increases to 70 bps. P/E rating falls.

GDP growth: We assume 2.3% GDP growth in Singapore in 2015. This should result in c.5.6% group loan growth. Interest rates: DBS should be a beneficiary of rising rates. Tougher credit outlook: We do not expect significant deterioration in credit quality, but see loan loss charges increasing from current low levels.

Potential Catalysts Rising margins driven by rising global rates, accompanied by only modest rise in loan loss charges Continued growth in client-related revenues in wholesale banking business.

Risks to Achieving Price Target Slowdown in China leads to weaker ASEAN growth and a material deterioration in Asian credit quality (downside) Delay in global rate increases (downside) DBS attempts another acquisition (downside)

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DBS Valuation We value DBS using a three-stage Gordon growth model. This model adds the NPV of a specifically forecast 10year dividend stream to the NPV of an implicitly forecast 10-year dividend stream (where the dividend is calculated using RoE and payout ratios), and finally adds the NPV of year-20 book value. We show the output below. We also forecast bull- and bear-case earnings, and set a bear-case valuation assuming recent “out-of-crisis” P/E multiples on 2015e bear-case earnings. We set a bull-case valuation assuming recent P/E multiple highs are applied to bull-case earnings forecasts. We set our price target by assuming a 75% probability to our base-case outcome, 20% probability to our bearcase outcome and a 5% probability to our bull-case outcome; these weightings are unchanged. The greater bear than bull case weighting is based upon our assessment of risks given slowing ASEAN GDP growth compared to the period from 2010 to 2014. Whereas we raise our bull case value 17%, we lower our base case and bear case values 7% and 8%, respectively.

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Exhibit 38: DBS 3-stage GGM

So u rce: Co mp an y Data, Mo rgan Stan ley Research Estimates

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DBS Financial Summary Exhibit 39: DBS Financial Summary, FYE Dec, S$m

So u rce: Co mp an y Data, Mo rgan Stan ley Research Estimates

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Risk-Reward – OCBC Risks to upside, rising CET1 could be catalyst Investment Thesis Improving global growth outlook should help Singapore GDP growth and improve market activity. Rising rates should help lift NIM at OCBC, driving ROE improvement. Insurance companies tend to outperform banks in a rising rate environment; given OCBC's exposure to GEH, it could outperform. Following acquisition of WHB, OCBC has the group's lowest fully loaded CET1 ratio. As this increases, valuation discount relative to history should fade.

Key Value Drivers So u rce: Th o mso n Reu ters, DataStream, Mo rgan Stan ley Research estimates

Price Target S$11.30

We derive our price target by probability-weighting our bull, bear and base cases at 5%, 20% and 75%, respectively.

Bull

Strong global growth: Global growth exceeds market expectations, driving faster Singapore growth and capital markets revenues. Higher interest rates result in higher NIMs. Great Eastern Holdings (GEH) valued at 1.5x EV.

S$17.41

17.0x Bull Case 16e EPS

Base

S$12.07

14.3x Base Case 16e EPS

Bear

S$6.87

10.1x Bear Case 16e EPS

Slow global growth: Singapore GDP of 2.3% for 2015. Group loan growth slows, NIMs begin to trend up, stable capital market revenues. GEH at 1.25x EV. Weak global growth: Singapore 2015 GDP of 1.9%. Faster than expected rate increases in US drive higher loan loss charges. GEH at 1x EV.

GDP growth: We assume 2.3% in Singapore in 2015. This should result in c.5.2% group loan growth Interest rates: OCBC should benefit from rising rates. Credit outlook: We expect credit quality to deteriorate modestly, and loan losses to rise from current low levels.

Potential Catalysts NIMs increase. Market values GEH more in line with insurance peers, resulting in a re-rating. OCBC executes well on WHB integration, gets credit for overseas growth and is gradually able to rebuild capital ratios.

Risks to Achieving Price Target Developed market recession leads to <5% loan growth and material deterioration in Asian credit quality. Timing mismatches on asset and liability values in the participating fund at GEH hit near-term profits. Withdrawal of liquidity from Asian market leads to greater-than-expected currency depreciation, tighter liquidity and slowing growth, raising credit costs. Hong Kong experiences worse than expected credit cycle. OCBC unable to rebuild capital ratios as quickly

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OCBC Valuation We value OCBC's banking business using a three-stage Gordon growth model in which we sum the NPV of 10 years of explicit dividend forecasts, 10 years of implicit dividend forecasts (deriving dividends from RoE and payout ratio over a fade period) and forecast terminal BV. We derive our base case valuation from this model. We show our base case assumptions below. Our bull case valuation is derived by applying a P/E 1 SD above the average multiple we use for bull case 2015e earnings. Our bear case valuation is derived by applying a P/E 1 SD below average to bear case 2015e earnings. (The period for the historical averages starts in December 1991.) We separately value Great Eastern Holdings (GEH) by applying historical EV multiples. Under our bear case, we apply a 1x multiple; under our base case, 1.25x; and under our bull case, 1.5x. The bottom of the range is driven by its historical trading level, the top end by AIA’s multiple. Our base case assumes a partial re-rating from current levels towards AIA’s multiple. As noted above, we apply a 13% fair value discount to the composite banking and insurance valuation to reflect the group's increased leverage since the acquisition of Wing Hang. We assign a 5% probability to our bull case scenario, 75% probability to our base case valuation and 20% probability to our bear case scenario (in line with our valuation of other Singapore banks). The greater bear than bull case weighting is based upon our assessment of risks given slowing ASEAN GDP growth compared to the period from 2010 to 2014. Whereas we raise our bull case value 9%, our base case value rises <1%, and our bear case value decreases 25%.

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Exhibit 40: OCBC 3-stage GGM

So u rce: Co mp an y Data, Mo rgan Stan ley Research Estimates

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OCBC Financial Summary Exhibit 41: OCBC Financial Summary, FYE Dec, S$m

So u rce: Co mp an y Data, Mo rgan Stan ley Research Estimates

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Risk-Reward – UOB Less Benefit from Rising Rates than Peers Investment Thesis Growth fairly valued, in our view. Growth outlook could improve with higher interest rates or better capital markets, but peers would likely benefit more. UOB has greater exposure to the ASEAN commercial sector, which could make it vulnerable to rising credit costs if the economies slow further. Least diversified exposure to regional commercial and wealth banking.

Key Value Drivers

So u rce: Mo rgan Stan ley Research estimates, Th o mso n Reu ters

Price Target S$24.24

We derive our price target by probability-weighting our bull, bear and base cases at 5%, 20% and 75%, respectively.

Bull

Stronger global growth: Global growth exceeds market expectations, driving faster Singapore growth and capital markets revenues. Higher interest rates result in higher NIMs.

S$32.59

13.6x Bull Case 2016e EPS

GDP growth: We assume 2.3% GDP growth in Singapore in 2015. This should result in c.4.4% group loan growth. Interest rates: UOB should benefit from rising rates. Credit outlook: We expect modest deterioration in credit quality as a result of the global slowdown, and expect loan loss charges to increase from the current very low levels.

Potential Catalysts/Upside Risks Base

S$25.98

12.5x Base Case 2016e EPS

Bear

S$15.64

10.6x Bear Case 2016e EPS

In-line global growth: Singapore GDP growth of 2.3% for 2015. NIM steadily improves. Weak global growth: Slower GDP growth and slower group loan growth, credit quality deteriorates. UOB valued at recent trough levels.

UOB outperforms in a weak equity market environment. Regional business expands ahead of expectations. SME credit deterioration fails to materialize.

Risks to Achieving Price Target Global economic slowdown leads to credit problems for SMEs. UOB suffered from this more than its peers did in 2008, and could do so again. UOB fails to generate revenue growth from its investments in other ASEAN markets.

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ASEAN Financials | September 9, 2015

MORGAN STANLEY RESEARCH

UOB Valuation We value UOB using a three-stage Gordon growth model. This model adds the NPV of a specifically forecast 10year dividend stream to the NPV of an implicitly forecast 10-year dividend stream (where the dividend is calculated using RoE and payout ratios), and finally adds the NPV of year-20 book value. We show the output below. We also forecast bull- and bear-case earnings, and set a bear-case valuation assuming recent “out-of-crisis” P/E multiples on 2015e bear-case earnings. We set a bull-case valuation assuming recent P/E multiple highs are applied to bull-case earnings forecasts. We set our target price by assuming a 75% probability for our base-case outcome, a 20% probability for our bear-case outcome and a 5% probability for our bull-case outcome. The greater bear than bull case weighting is based upon our assessment of risks given slowing ASEAN GDP growth compared to the period from 2010 to 2014. Whereas our bull case value rises 17%, we trim our base case value 1.5%, and our bear case value decreases 11%.

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ASEAN Financials | September 9, 2015

MORGAN STANLEY RESEARCH

Exhibit 42: UOB 3-stage GGM

So u rce: Co mp an y Data, Mo rgan Stan ley Research Estimates

27

ASEAN Financials | September 9, 2015

MORGAN STANLEY RESEARCH

UOB Financial Summary Exhibit 43: UOB Financial Summary, FYE Dec, S$m

So u rce: Co mp an y Data, Mo rgan Stan ley Research Estimates

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ASEAN Financials | September 9, 2015

MORGAN STANLEY RESEARCH

Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited, regulated by the Securities and Exchange Board of India (“SEBI”) and holder of licenses as a Research Analyst (SEBI Registration No. INH000001105); Stock Broker (BSE Registration No. INB011054237 and NSE Registration No. INB/INF231054231), Merchant Banker (SEBI Registration No. INM000011203), and depository participant with National Securities Depository Limited (SEBI Registration No. IN-DP-NSDL-372-2014) which accepts the responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research, and/or PT Morgan Stanley Asia Indonesia and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please contact the Client Support Team as follows: US/Canada +1 800 303-2495; Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81 (0)3-6836-9000. Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Edward Goh, CFA; Nick Lord. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

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Important US Regulatory Disclosures on Subject Companies As of August 31, 2015, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Metropolitan Bank & Trust Company. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from DBS Group Holdings. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AMMB Holdings, Bangkok Bank Public Company Limited, Bank Central Asia, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank of the Philippine Islands, Bank Rakyat Indonesia, BDO Unibank, CIMB Group, DBS Group Holdings, Kasikorn Bank Public Company, Krung Thai Bank Public Company, Maybank, Metropolitan Bank & Trust Company, Oversea-Chinese Banking Corp, Public Bank, RHB Capital Berhad, Singapore Exchange Ltd, The Siam Commercial Bank Public Company, TISCO Financial Group Public Company, United Overseas Bank. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AMMB Holdings, Bangkok Bank Public Company Limited, Bank Central Asia, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank of the Philippine Islands, Bank Rakyat Indonesia, BDO Unibank, CIMB Group, DBS Group Holdings, Kasikorn Bank Public Company, Maybank, Metropolitan Bank & Trust Company, Oversea-Chinese Banking Corp, Public Bank, RHB Capital Berhad, The Siam Commercial Bank Public Company, United Overseas Bank. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: AMMB Holdings, Bangkok Bank Public Company Limited, Bank Central Asia, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank of the Philippine Islands, Bank Rakyat Indonesia, BDO Unibank, CIMB Group, DBS Group Holdings, Kasikorn Bank Public Company, Krung Thai Bank Public Company, Maybank, Metropolitan Bank & Trust Company, Oversea-Chinese Banking Corp, Public Bank, RHB Capital Berhad, Singapore Exchange Ltd, The Siam Commercial Bank Public Company, TISCO Financial Group Public Company, United Overseas Bank. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: AMMB Holdings, Bangkok Bank Public Company Limited, Bank Central Asia, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank of the Philippine Islands, Bank Rakyat Indonesia, BDO Unibank, CIMB Group, DBS Group Holdings, Kasikorn Bank Public Company, Krung Thai Bank Public Company, Maybank, Metropolitan Bank & Trust Company, Oversea-Chinese Banking Corp, Public Bank, RHB Capital Berhad, Singapore Exchange Ltd, The Siam Commercial Bank Public Company, United Overseas Bank. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution (as of August 31, 2015) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond 29

ASEAN Financials | September 9, 2015

MORGAN STANLEY RESEARCH Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. COVERAGE UNIVERSE

STOCK RATING CATEGORY

Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell

TOTAL

INVESTMENT BANKING CLIENTS (IBC)

COUNT

% OF TOTAL

COUNT

% OF TOTAL IBC

% OF RATING CATEGORY

1206 1446 94 601

36% 43% 3% 18%

356 352 11 83

44% 44% 1% 10%

30% 24% 12% 14%

3,347

802

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.

Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.

Stock Price, Price Target and Rating History (See Rating Definitions)

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ASEAN Financials | September 9, 2015

MORGAN STANLEY RESEARCH

Important Disclosures for Morgan Stanley Smith Barney LLC Customers 31

ASEAN Financials | September 9, 2015

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ASEAN Financials | September 9, 2015

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RATING (AS OF)

PRICE* (09/08/2015)

E (09/09/2013) E (03/18/2014) U (01/30/2015) E (01/30/2015) E (01/23/2014)

RM4.31 Bt18.20 RM17.86 RM5.94 Bt38.75

O (08/13/2013) U (01/03/2014) O (06/13/2011) U (06/05/2014) U (08/13/2013) O (09/12/2014) U (02/19/2014)

Rp11,800 Rp3,485 Rp8,800 Rp4,715 Rp9,925 Rp1,030 Rp2,950

U (10/03/2014) E (01/05/2015) E (01/05/2015) E (01/30/2015) O (08/02/2013) O (04/26/2012) O (09/29/2014) O (01/05/2015) O (06/20/2013) O (07/19/2014) E (04/26/2012) E (10/04/2010)

Bt161.50 PP84.00 PP93.50 RM4.72 S$17.70 Bt179.00 RM8.58 PP79.95 S$8.99 S$7.41 Bt139.00 S$19.30

Edward Goh, CFA AMMB Holdings (AMMB.KL) Krung Thai Bank Public Company (KTB.BK) Public Bank (PUBM.KL) RHB Capital Berhad (RHBC.KL) TISCO Financial Group Public Company (TISCO.BK)

Mulya Chandra, CFA Bank Central Asia (BBCA.JK) Bank Danamon Indonesia (BDMN.JK) Bank Mandiri (BMRI.JK) Bank Negara Indonesia (BBNI.JK) Bank Rakyat Indonesia (BBRI.JK) Bank Tabungan Negara (BBTN.JK) Bank Tabungan Pensiunan (BTPN.JK)

Nick Lord Bangkok Bank Public Company Limited (BBL.BK) Bank of the Philippine Islands (BPI.PS) BDO Unibank (BDO.PS) CIMB Group (CIMB.KL) DBS Group Holdings (DBSM.SI) Kasikorn Bank Public Company (KBANK.BK) Maybank (MBBM.KL) Metropolitan Bank & Trust Company (MBT.PS) Oversea-Chinese Banking Corp (OCBC.SI) Singapore Exchange Ltd (SGXL.SI) The Siam Commercial Bank Public Company (SCB.BK) United Overseas Bank (UOBH.SI)

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

© 2015 Morgan Stanley

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