SINGAPORE (March 14): OCBC is recommending DBS as its top pick for the banking sector with a fair value estimate of $17.50. The bank also has a “buy” call for UOB.

“While OCBC expects the market to stay volatile due to the uncertain outlook ahead, we believe that the recent selling has already priced in most of the negative factors in the market,” says lead analyst Carmen Lee in a March 11 report.

Lee says the exposure to commodity, oil & gas and China of the three local banks have been coming off since 3Q15, and are manageable as a percentage of total loan books.

The portfolios of the banks have been stress tested at US$20 per barrel ($27.5 per barrel), and oil has already staged a recovery recently to almost US$40 per barrel.

Exposures to commodity and China loans are mainly to the larger corporates and these loans are currently still being serviced.

At this year’s low, the price-to-book ratio touched as low as 0.8x for DBS or two standard deviations below its 10-year historical average and also near the level seen during the 2008-2009 Global Financial Crisis (GFC).

“This ratio has since improved to an average of 0.96x for the sector – a level which we deemed to be still attractive,” says Lee.

Meawhile, although investors were concerned that the economic slowdown and the potential drag on corporate earnings could lead to a cut in dividend payout, this did not happen.

All three banks maintained their dividend payouts for the year. This amounted to 60 cents for DBS, 36 cents for OCBC and 70 cents for UOB (excluding one-off special dividend).

To recap, the banks’ earnings came in better than market expectations.

While there were expectations of higher provisions, the amount was not excessive and non-performing loan (NPL) ratios were still within expectations.

DBS reported 4Q15 net earnings of $1 billion, OCBC posted net earnings of $960 million and UOB generated net earnings of $788 million.

From the previous quarter, provisions rose 39% to $247 million for DBS, 29% to $193 million for OCBC and 19% to $190 million for UOB.

Net interest margin (NIM) improved for all three banks, from 1.78% in 3Q15 to 1.84% in 4Q15 for DBS, from 1.66% to 1.77% for OCBC and from 1.77% to 1.79% for UOB.

As at 10.39am, DBS is up 2.23% at $15.58, UOB is up 1.23% at $18.88 and OCBC is up 1.82% at $8.96.