Within expectations. UOB’s 1Q13 net profit of SGD722m was broadly in line, at 26% of our full-year and 27% of consensus. With expectations of a moderation in earnings over the subsequent quarters, our forecasts are maintained. We expect UOB’s earnings to be flat this year on the back of lower trading income and ongoing NIM compression. Our SELL call is maintained but with a raised TP of SGD20.50 on a FY13 P/BV of 1.3x (1.2x previously) amid higher peer valuations, but with a discount to reflect the risk of a larger impact to UOB from a slowdown in mortgage origination in 2H13, given its larger property exposure.

1Q13 net profit of SGD722m (+5% YoY, +4% QoQ) was supported primarily by strong fee income growth of 25% YoY. Healthy loan growth of 13% YoY was offset by a 28 bp YoY contraction in NIM (-6 bps QoQ), while provisions rose 25% YoY. Loan growth would have been about 10% YoY excluding a lumpy corporate loan, which also contributed to the jump in fee income during the period.

NIM contracted by 6 bps QoQ to 1.70%, as opposed to a +2 bps improvement to 1.64% for DBS and a 6 bps QoQ decline in NIM to 1.64% for OCBC. Yields declined a hefty 14 bps QoQ due to a) lower yields on the lumpy corporate loan, b) ongoing mortgage substitution and c) the replacement of older securities that matured with lower yielding ones. Where there was offset was in better asset utilization, whereby the group’s LDR improved to 87% end-Mar 2013 from 84% end-Dec 2012, and better funding mix, which lowered funding costs.

Looking forward, management maintains its guidance of high-single digit loan growth on the assumption that the corporate loan is repaid during the year and in anticipation of slower growth in 2H13. Fee income is also expected to normalize in the subsequent quarters in the absence of major deals. Management hopes for NIM stabilization in the coming quarters, with support from regional countries. NIMs in Malaysia are still expected to compress, but should hold steady in Thailand and Indonesia to provide some buffer.

Source: Maybank Kim Eng Research - 03 May 2013