UOB reported 1Q14 results on 30 April after market close which beat analysts’ estimates as compiled by Bloomberg. Macquarie Equities Research (MER) released a research report on the same day with an ‘Outperform’ recommendation and a 12-month price target of S$21.88.
 
Impact
MER key takeaways and conclusion– (i) capital ratios improved from an already strong level, (ii) different margin trends relative to DBS and OCBC, (iii) UOB is more conservatively positioned in Greater China. As a result of increasing deposit funding costs, there is the risk of margin pressure outside of Singapore.
 
Earnings summary– UOB reported an underlying net profit of S$ 788m (+9% YoY and +2% QoQ) which compares with market expectations of S$ 740m. Adjusting for disposal gains and a low tax-rate would result in in-line results relative to expectations.
 
Different margin trends relative to DBS and OCBC – The net interest margin for UOB declined slightly by 1 bp QoQ to 173 bp which compares with a 5-6 bp QoQ increase for DBS and OCBC. The reasons were (i) no improvement in reinvestment yields of excess liquidity and (ii) less support from higher China related trade finance margins. In-line with the two other banks, loan growth was strong for UOB (13% YoY and 4% QoQ).
 
Watchful on higher funding costs outside Singapore – Management expects deposit funding cost pressure for the sector outside Singapore. In particular Indonesia seems to be at risk of a deposit re-pricing.
 
Solid Asset Quality outlook – Non performing loans and the NPL ratio (of 1.1%) remained flat QoQ. UOB sees no signs of asset quality deterioration but the bank remains watchful in Thailand.
 
Capital as a big positive– A key positive in the results was the improvement in capital ratios from an already strong level. The fully loaded Basel 3 core tier I ratio improved to 12.5% from 12.0% in 4Q13. While this was partially due to model changes, it compares very favourably to OCBC (11.0%) and DBS (11.7%).

Price catalyst
12-month price target: S$21.88 based on a fair value methodology.
 
Catalyst: earnings momentum from overseas markets
 
MER’s action and recommendation
MER has an Outperform recommendation on UOB - Target Price S$ 21.88. UOB has the strongest capital position among Singapore banks, a good business strategy and MER sees low China related risks for UOB.

Source: Macquarie Research - 6 May 2014