Within expectations. UOB’s 1H13 net profit of SGD1.5b was within our expectations (53% of full-year) but above consensus (56%). Overall results were fairly lackluster on account of a decline in non-interest income, while bottomline growth was driven primarily by lower provisions and a one-off associate gain. UOB’s higher exposure to the domestic property sector remains our primary concern, and for which we believe a discount to peers is warranted at this stage. We maintain our SELL call on the stock with an unchanged TP of SGD20.50, rolled forward to FY14 on a lower P/BV of 1.2x (1.3x previously) to factor in higher market volatility risk.

2Q13 operating profit declined 3% YoY and 6% QoQ, largely on account of a drop in non-interest income, which offset fairly robust fee income growth of 13% YoY. Pretax profit growth of 9% was essentially driven by lower provisions and a one-off associate gain relating to the sale of investment securities of about SGD79m.

Positively, loan growth was a robust 15% YoY and management has raised its guidance for the year to low- to mid-teens growth (sub-10% previously). NIMs were also stable QoQ and guidance is for this to persist for the rest of the year. The decline in non-interest income was largely a function of mark-to-market losses during the quarter, in tandem with rising yields.

Positioned for further yield curve steepening. As with DBS, management has shortened the duration of its investment portfolio and is currently neutral to rate increases. Both banks nevertheless maintain the view that the yield curve is likely to steepen further but that the banks are positioned to take advantage of this.

Property exposure still our concern. Housing loans currently account for 28% of UOB’s loan portfolio end-June vs 20% for DBS. Moreover, 25% of its borrowers have more than one property loan as opposed to just 4% for DBS.

Source: Maybank Kim Eng Research - 2 Aug 2013