Singapore bank shares have potential to re-rate in short term following recent underperformance vs Southeast Asian lenders, says Royal Bank of Scotland, according to Dow Jones.

RBS notes stocks only +1.3% over last 3 months vs +25.5% by Thai banks, +18.7% by Indonesian banks, +15.7% by Malaysian banks over same period; "this seems unmerited as we expect solid, if not spectacular, earnings growth, while valuations are materially below regional peers."

RBS attributes underperformance to defensive business models, low returns, but says DBS (D05.SG), OCBC (O39.SG), UOB (U11.SG) due to catch up, with pre-provision operating profit being main catalyst.

Forecasts Singapore banks will deliver pre-provision operating profit growth of 14.9% in FY11, 18.8% in FY12, broadly in line with peers in Thailand, Malaysia, 2 markets where banks have significantly re-rated. Rates both OCBC, UOB at Buy with $11.00, $23.00 targets respectively, but keeps DBS at Sell with $11.50 target on view it has most to lose with low Sibor.

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