• Cautiously optimistic outlook
• Prudent risk management
• Maintain HOLD

Mixed outlook for region, but continuing

to focus on prudent risk management While there were some post-results concerns about UOB’s less-than-peers’ exposure to China, management reiterated that they are still positive on the longer-term outlook of this economy, but prefer to take a more conservative stance in terms of its risk exposure for the near to medium term as the economy undergoes restructuring. They also dismissed concerns about UOB’s exposures to the regional economies as the group has a less than 2% market share in each of these countries. In addition, it is not competing head-on with domestic players for the same segment of clients and tends to focus on clients with regional businesses.

Funding cost likely to head up

Signs are emerging that funding costs will go up as competition picks up in the local market, especially in the retail consumer space. Fortunately, on the mortgage loans re-pricing side, the situation is somewhat more manageable as it is no longer as easy as in the past to re-finance existing mortgage loans. Overall, this is an area that management intends to focus on to ensure stability of funding in all its key regional markets.

Better 1Q; maintaining FV of S$22.40

As a recap, UOB’s 1Q14 net earnings of S$789m came in stronger than market expectations. However, NIM stayed relatively flat in 1Q14 at 1.73% versus improvements for its peers. Management expects margins to hover at around the current level. Taking into account the mixed medium-term outlook for the region, we have increased our impairment charge estimates in both FY14 and FY15. We are expecting a 5-8% increase in total operating income, but this will drop to 4-5% at the operating level due to higher operating expenses, raising our cost-toincome ratio to around 45% (from 42%-43% in FY11-FY13). However, we are retaining our fair value estimate of S$22.40 and at current price, we are also retaining our HOLD rating.

Source: OCBC Research - 7 May 2014