United Overseas Bank - A better-than-expected 2Q12

SG: United Overseas Bank (UOB SP) | Financials | Price Target: 17.30 | SELL | Downside 13%

Valuations raised, Sell maintained. 2Q12 net profit of SGD713m (up 4% QoQ, 12% YoY) was better than expected, accounting for 54% our full-year forecast, 56% of consensus. Upside surprise emanated from still-high investment gains and lower-than-expected provisions. Our 2012 forecast is raised by 4% while our TP is revised up to SGD17.30 from SGD15.50 on a P/BV of 1.2x (1.1x previously) to reflect a higher 2012 ROE projection of 11.9% (11.5% previously). Much of the positives are in the price, in our view, with the stock trading at a 2012 P/BV of 1.4x vs an average of 1.2x for its peers, while yields are just about 3.5%.

Positively, investment gains, while down 10% QoQ, held up better than its peers’. Fee income, meanwhile, saw expanded healthily by 14% YoY, with still healthy expansion in loan-related income (+10% YoY) and higher investment-related fees.

On the flip side, NIMs compressed 6 bps QoQ to 1.92% (-5 bps for DBS, -9bps for OCBC). The narrowing was mainly in Singapore, where mortgage competition is intense and funding costs are still pressured. NIMs in Malaysia and Thailand slipped 1-3 bps but improved 20 bps in Indonesia. Guidance is for ongoing pressure in 2H12, but to a lesser extent than in 2Q, given expected stability in regional NIMs.

Loan growth guidance lowered. Annualized loan growth of 8% trails earlier expectation of mid-teens growth and cautiousness prevails, with guidance lowered to high-single digit loan growth for the year. 2Q12 saw Singapore annualized loan growth at 9% annualized, but a stronger 14.6% in Malaysia, where the group has made significant headway into the corporate lending market.

Wee Cho Yaw takes on position as Chairman Emeritus and will stay on as a director of the bank. Taking up his position as Non-Executive Chairman is Hsieh Fu Hua, who was previously CEO of the Singapore Exchange and a board member of Government of Singapore Investment Corporation and Temasek Holdings.

Other highlights

A liquid balance sheet. The group’s balance sheet remains adequately liquid, with a combined loan/deposit ratio (LDR) of 87%. Its Singapore LDR was 84% end-June 2012, 90% for Malaysia, 112% for Thailand (96% including Bills of Exchange) and 92% for Indonesia.

Improving regional contributions. From 77% of group pretax profit, Singapore operations now account for 63%, with the second largest contributor being its Malaysian operations (16%). Indonesia and Greater China contribute to 6-7% respectively, with Thailand at 3%.

Stable asset quality, and management does not see any signs of systemic stress. In absolute terms, NPLs have risen 9% to SGD2.1b since hitting a low of SGD1.9b in 2Q11. The group’s NPL ratio nevertheless remains stable at 1.4%, while loan loss coverage is more than adequate at 137%. Credit charge rates were stable and benign at 30 bps in 2Q12.

Source: Maybank Kim Eng Research - 8 August 2012