Post Results Highlight

Net Interest Margins

• NIMs continue to decline 5-8 bps q-q in 4Q12, with UOB’s NIMs weakest at -8bps and OCBC and DBS at -5bps
• In 4Q12. NIMs pressure was due to 1) shortening of securities portfolio duration reducing yields, 2) Lower pricing power and 3) pressure from mortgage loans
• NIMs pressure expected to continue due to pressure from mortgage loans, and lower pricing power in 1H13, but may ease or even improve in 2H13.

Loans growth outlook

• Loans grew in the mid-high single digits in FY2012
• Management guides high single digit loans growth forFY2013.
• FY2013 Net interest income growth to be muted Fees and Commission
• Fees and commission, especially from Wealth management, Trade related and Loan related fees, expected to be revenue driver
• Gaining traction from stronger client relationships, wide range of product offerings, and rising wealth.

Non Interest income (Non II)

• Non II main contributor of FY2012 earnings surprise
• OCBC’s exceptional Non II performance due to gains from non-participating fund likely non recurring
• Non II may continue to surprise on the upside in FY2013

Investment actions

While growth in core net profits has been strong in FY2012, growth in FY2013 is expected to be marginal, due to lower growth of Net interest income, and likely lower non-interest income from a high base. Fees and commission is expected to grow, but this constitutes a smaller proportion of total revenue at approximately 20%. The impact on total revenue growth is therefore reduced.

With lower y-y growth potential in FY2013, especially in 1H13, we are “Neutral” on the banking sector. We maintain our “Accumulate” rating on UOB (TP $20.95) and DBS (TP: $15.80), and “Reduce” on OCBC (TP: $8.84) based on current valuations. We prefer UOB to DBS and OCBC.

Source: PhillipCapital Research - 07 Mar 2013