• 4Q exceeded expectation
• Guidance is generally positive
• Cutting FV to S$20.94; downgrade to HOLD

4Q earnings ahead of expectations; FY cross S$3b mark

UOB posted 4Q13 net earnings of S$773m versus market estimate of S$656m (based on Bloomberg). This is up 11% YoY or 6% QoQ. This gives FY13 earnings of S$3008m, up 7%. Net Interest Income (NII) rose 13.3% YoY and 4.7% QoQ to S$1095m in 4Q13 despite challenging market conditions. As with its peers, it saw an improvement in Net Interest Margin (NIM) on a QoQ basis, up from 1.71% in 3Q13 to 1.74% in 4Q13. This points to stabilizing margins in 2H13 for the local banks. Together with better Noninterest Income, broad-based fee income growth and lower impairment charges, it posted a strong set of quarterly earnings. Management declared a final dividend of 50 cents and a special dividend of 5 cents, giving full year dividend payout of 75 cents, up from 70 cents in FY12.

Guiding for high single-digit loans and double-digit fee income growth

Management has guided for high single-digit loans growth in FY14 and expects margin to stay flat for the year. Management is also generally cautiously optimistic about the outlook for 2014 despite lingering concerns for developed markets and China. For its fee income, management is expecting to maintain the growth momentum this year, or double-digit growth this year.

Upped our FY14 earnings; but downgrade to HOLD

With the positive guidance from management, we have revised both our FY14 NII and Non-interest Income estimates, cut impairment charges, resulting in an increase in total net earnings from S$2981m to S$3135m. However, as market sentiment is still cautious for the near to medium term, we believe that valuations are likely to remain capped. As such, we have lowered our valuation from 1.4x book to 1.3x book. With this, our fair value estimate dropped from S$22.97 to S$20.94. Based on current price, the total potential upside is less than 10%. As such, we downgrade UOB to HOLD and will be buyers below S$19.70.

Source: OCBC Research - 17 Feb 2014