UOB was the worst performing bank yesterday despite reporting record net earnings for the financial year of 2012. The bank gapped up more than 1% at the open, compared to Wednesday’s close. However, it failed to sustain and UOB closed at $19.08, down 0.6% for the day.

UOB, the last local bank to announce earnings, announced their financials on 27 February. On the same day, Macquarie Equities Research (MER) released a research report stating that the bank’s 4Q12 results beat their forecast by 3%. MER has an ‘Outperform’ rating on the bank and a 12-month price target of $21.14. Excerpts from the research report “Low tax rate leads to earnings beat” are shown below.

• Net interest margins (NIM) fell 8bps QoQ, worse than MER’s 5bp forecast, as asset yields declined by 11bps QoQ. This included a 5bp decline in loan pricing with more significant falls in securities and interbank yields. UOB shifted its securities mix to short-duration assets in 4Q as a view on a potential yield curve steepening in 2H13. UOB expect NIMs to remain under pressure in 1H13, in line with MER’s view.
• Operating costs spiked on a rise in staff compensation in 4Q12. However, on a full-year basis the rise in staff costs was in line with the 14% revenue growth, while total operating expense expanded by 2ppt lower at 12%, so cost transfer invoice (CTI) fell 1ppt YoY to 42%.
• Provisioning rose 26% QoQ, unusual for the sector. Management attributes this to the same single OECD exposure discussed in 3Q12 rather than a systemic issue. Profit before tax was 5% below MER’s forecast, but a 6% tax rate – the result of dual tax agreements and other one-offs – led to the higher-than-expected net income.

DBS previously announced earnings on 6 February and MER released a research report “PPoP shifts into reverse” within the same day. MER has an ‘Outperform’ rating and a 12-month target of $15.16 on DBS.  Some excerpts from the report are shown below.

• NIM compression of 5bp QoQ was a key factor. MER had forecast flat QoQ NIMs. But spreads were hit by a 4bp decline in asset yields and a 1bp increase in funding costs. As a result, net interest income fell 3% QoQ and was flat YoY despite loan expansion of 4% QoQ and 8% YoY.
• The loan mix seems to have shifted back to a higher proportion of trade finance lending in 4Q12, as USD-denominated loans grew 8% QoQ while general commerce loans expanded by 7% QoQ.
• Non-interest income and expenses were more in line with MER’s forecasts, but the weak top line pushed pre-provisioning operating profit into reverse. Credit costs were just 11bps annualized with non performing loans down to just 1.2%.

OCBC is MER’s least favourite, with a ‘Neutral’ rating and a 12-month target of $9.60. The bank announced 4Q12 earnings on 15 February and MER’s research report “Non-interest income boosts 4Q12” was published on the same day. Excerpts taken from the report are shown below.

• Operationally, net interest income was flat YoY but down 2% QoQ and 3% below MER’s forecast, as NIM fell 5bps on a drop in interbank and securities yields. But non-interest income (+32% YoY) was boosted by a 21% YoY increase in fees and a quadrupling of insurance earnings.
• Staff compensation cost pressure remains an issue for OCBC. Operating expense was up 14% YoY in 4Q12, outgrowing revenues by 2ppt and leading to a 43% cost income ratio (CIR) for 4Q12. But asset quality looks outstanding, with non-performing loans trending down to 0.8% and full-year credit costs coming in at just 20bps of average net loans.

Source: Macquarie Research - 01 Mar 2013