UOB above expectations 1Q

Generated higher-than-expected 1Q earnings of S$722m
In line with the other two banks, UOB Group posted 1Q13 net earnings which also exceeded street expectations. 1Q net earnings of S$722m were up 5% YoY and 4% QoQ and ahead of consensus of S$688m based on Bloomberg poll. While Net Interest Income fell 4% YoY and flat QoQ to S$964m, its overall performance was buoyed by higher Non-Interest Income, which rose 12% YoY and 13% QoQ to S$708m. Together with lower operating expenses, this gave its operating profit a boost to S$976m. Net Interest Margin (NIM) fell from 1.98% in 1Q12 and 1.76% in 4Q12 to 1.70% in 1Q13. Loans grew a healthy 7.4% from last quarter to S$167b. Impairment charge fell QoQ from S$150m to S$130m.

Double-digit growth in Fee Income
The key highlight was the strong 17% QoQ or 25% YoY increase in Fee and Commission Income to S$453m in 1Q13. On a QoQ basis, several units enjoyed strong double-digit growth. This included loans (+63%), fund management (+19%) and Investment (+18%).

Downgrade to HOLD; FV raised to S$22.97
The outlook for NIM is still mixed and likely to hover at current level. Overall, we expect its FY13 performance to be supported by higher fee income, with growth rate for Non-Interest Income doubling that of Net Interest Income. We do not expect a repeat of the strong 1Q13 Fee Income for the remaining three quarters of the year. Taking these into consideration, we made very slight adjustments to our FY13 earnings projection, dropping it from

UOB Healthy outlook, maintain Accumulate

What is the news?

Since we upgraded UOB from Reduce to Accumulate on 8 Nov 2012, share price dipped marginally before rallying as per our expectations. How do we view this? While the macro economy remains uncertain, we continue to expect UOB to deliver strong results for the next few quarters. Loans growth is expected to be moderate but positive, mitigating the continued pressure on NIMs. Fees and Commission are expected to grow rapidly, driven by strong transaction banking and wealth management performances. Geographically, contributions from UOB’s overseas subsidiaries are expected to increase. UOB may also benefit from an improvement in the China economy, which may drive higher trade volumes and banking services between China and ASEAN, in which UOB has strong capabilities in.

Investment Actions?
We increase our P/B forward multiple to

UOB declared an interim dividend of 20S¢ per share

Only one amongst peers with sequential net profit growth. UOB recorded 2Q12 net profit of S$713m, up 3.6% QoQ. This is above market expectations of S$627m. The improvement is attributed to stronger fee & commission income offsetting (1) weakness in trading income; and (2) lower gains from sale of investments. Though NIM of 1.92% was 6 bps narrower QoQ, net interest income contracted a mild 1.7% QoQ as loans expanded marginally. UOB is the only bank amongst the three to record a sequential growth in net profit. We raised our FY12F net profit by 6% to S$2.48b primarily due to a lowering of provisions expectations. UOB remains our top pick and we maintain BUY. Target price is raised to S$21.40 based on 1.5x 2012 book (previously 1.4x), a discount to the 1.57x historical average.

NIM was squeezed, just like peers. NIM of 1.92% was 6 bps narrower QoQ due to high liquidity and keen market competition. UOB experienced NIM squeeze in markets such as Singapore and HK, whilst other regional markets recorded NIM stabilization. All the three banks’ recorded sequential NIM contraction. UOB management expects NIM to remain tight going forward. Management is guiding for high single-digit loan growth for FY12. We cut our FY12F loan growth to 9%, from 11% previously.

The bright spark is fee & commission income, which rose 6.7% QoQ, mainly driven by

UOB strong funding position enables asset growth

Target Price - S$19.42



UOB shed 3.5% in the two weeks post-results. Although the headline 4Q was not strong, we think it hid some positives, namely
1) expanding margins ahead;
2) promising build-up in US$ deposit base, and
3) a 4Q earnings that could have been 11-12% higher, ex-EU losses.

We upgrade UOB to Outperform after the stock’s slight underperformance post-results. Our S$19.42 target price (GGM, 1.36x P/BV) is unchanged. We see catalysts from a better 1Q12 when EU debt-related losses no longer impinge on P&L and another quarter of margin expansion drives topline.

UOB 3Q11 revenue fell to S$1.36b

JP Morgan - Price Target: S$18.00

UOB announced 3Q net profits of S$522mn, down 18% q/q, 24% y/y, 13% below street estimates of S$596mn and 6% below JPMe of S$556mn. Results details are on page 3. We expect the stock to open lower on back of weak results. DBS stays our top pick in the sector as earnings momentum and valuations are in favor of the bank. UOB has outperformed STI by 4% YTD, which should start reversing on back of these results.

- Key negative surprise was non-interest income down 15% q/q on back of treasury losses, lower loan related and rental income. Also, associate income (primarily brokerage) was down 60% q/q. The bigger risk for the stock from disappointment on treasury revenue is reevaluation of ‘preferred pick in the current environment’ status of the stock within Singapore banks.

- NIM came down 3bps q/q to 1.89%, primarily due to lower loan yields and higher deposit costs. NII was flat q/q. The basic banking spread (loan-deposit spread) declined 16bps q/q to 2.31%. This points to further NIM pressure in forthcoming quarters, in our view.

- Loan growth was solid at 22.4% y/y and 7% q/q, broadly in-line with industry. Growth was firm across the board, with General Commerce and Mortgages key contributors. LDR went up marginally to 87%.

- Costs went up 3% q/q, 14% y/y, leading to CIR moving up to 46.4% on revenue weakness. Staff costs were contained at 1.4% q/q growth but other costs went up 5.6% q/q.

- Credit costs came in lower than expected at 30bps annualized. NPL ratio was stable at 1.5% but NPLs went up 9% q/q in absolute terms, with increases in Singapore and Malaysia. Coverage ratio declined to 117% from 126% last quarter.


PhillipCapital - SGD 14.50

UOB 3Q11 results disappoint, missing our estimates for two consecutive quarters. Headwinds are seen on few fronts. 1H11 revenue and NPAT were 5% short of our full year forecast and by 3rd quarter, missed estimates were 8% and 11% respectively. We revise our earnings forecast to be in line with actual results. EPS is reduced to S$1.50 and fair valuation to S$14.50.

Overview:
- 3Q11 revenue fell to S$1.36b (-5.0% y-y; -5.4% q-q)
- Net interest income increased to S$915m (+3.6% y-y; +0.2% q-q). NIMs declined by 3bps to 1.89% from 1.92% in previous quarter.
- Fee and commission income gained, to S$323m (+13.9% y-y; -4.2% q-q)
- Other noninterest income declined to S$122m (-54% y-y: -34% q-q)
- Expenses increased to S$631m (+13.6% y-y; +3.1% q-q). Cost to income ratio climbed slightly from 42.6% in 2Q11 to 46.4% in 3Q11.
- NPAT declined to S$522m (-24.2% y-y; -17.9% q-q)
- Loans grew to S$137.6b (+22% y-y; +7% q-q)
- Deposits grew to S$158.4b (+11% y-y; +7% q-q) LDR increased from 79% in previous year and 86.6% in previous quarter to 86.9%.

Earnings were significantly lower and given the challenges seen in 3Q11, we are concerned about the group’s ability to navigate through the challenging terrain.

UOB faced the following issues while attempting to grow in 3Q11:
a. Increased funding costs
b. Slowing loans growth
c. Greater competition
d. Falling NIMs

Margins in Indonesia have declined by 40 bps to 5%, Malaysia and Thailand both fell by about 15 bps to 2.52% and 3.12% respectively. Margins pressure came about due to increase in competition in these lucrative markets. Despite the intense competition and the falling NIMs, when we compare to NIMs in Singapore which are only 1.5%, these countries remain good places to ramp up loans. We believe the decline in margins was also partly due to the negative SORs in Singapore.

Funding cost increased because UOB had shifted their funding source overseas to reduce mismatches in currencies between the deposits and loans. They have also extended the duration of deposits, again to reduce duration mismatches. As a result, funding costs increased and reduced their NIMs in 3Q11.

Management also saw loans approval slow regionally and markedly in Singapore. As a result of slowing loans growth and funding issues, UOB is choosing to lend only to credit worthy clients and to pick those with better margins. There is however often a trade off between credit quality and margins. It is a fine line.

e. Rising NPLs
In 4Q10, we saw rising NPL in the transportation industry. In 3Q11, the situation worsened and NPL reported was 7.4% versus 5.3% in previous quarter. It appears that the Australia client/s had suffered in the face of growing macroeconomic risks and UOB had to write down the loans again. Though management said it was the bank’s decision to downgrade and not a matter of portfolio degradation, we do think this could be the first sign of credit deterioration arising from headwinds in the macroeconomic environment.

f. Higher cost to income ratio

g. Lower NPM
The group saw the ratio increased from 42.6% to 46.4%. Management had guided cost income ratio of 45% but given the lower denominator this quarter, it is inevitable that the ratio soared. As for actual expenses, UOB is indeed spending more to improve infrastructure and platform. It has also added more headcount in 3Q11.

Rising cost and lower earnings resulted in lower net profit margins, which declined from 44% to 38%.

h. Hits in USD-SGD hedging
In 3Q11, UOB also took hits in its hedging book due to the rapid appreciation of USD against SGD.

Thailand’s Floods Management guided that they had taken S$500 million general provision few years for Thailand’s operations and had not utilize the provision to-date. They believe this provision to be ample for any potential losses arising from Thailand’s floods hence do not think there will be earnings impact.

Exposure to Eurozone
UOB AFS portfolio is about S$145 million below par. Their exposure is largely to UK, Netherlands, Germany, Sweden and Switzerland. The most vunerable amount identified is a S$200 million exposure to France.

Fed’s impact on banking sector
FED’s decision to maintain low interest rates for extended period means continued pressure on NIMs in future, through 2013. Flattening yield curve means lesser gapping opportunities for the banks. Both are detrimental for banks’ earnings and as it is, UOB is somewhat reeling from these impact already.

UOB missed our FY11 estimates by a wide margin. To reflect reality, we reduced earnings estimates by 13% to S$2.41 billion for FY11. Earnings in FY12 are also reduced by 25% to S$2.26 billion to reflect weaknesses in revenue streams. On a valuation front, we changed our parameters by increasing the Beta from 0.96 to 1.1. We expect the banks to be more volatile than the key index as the latter is anchored by defensive telco stocks. We downgrade UOB from Hold to Sell. Fair valuation is revised from S$20.12 to S$14.50. Given its current growth trajectory, it appears that UOB will have difficulties maintaining its lead over a key competitor. UOB has shown signs of negative impact arising from economic risks and we hold the opinion that the stock should trade at lower PB value to reflect its weaknesses. At S$14.50, UOB will be trading at about 1.13x PB versus 1.31x at current price. Previously, we pegged it to 1.5x PB.