• Earnings exceeded expectation
• China’s exposure is manageable
• Increasing FV to S$23.87

Better 2Q bottomline, but Fee Income was lower

UOB posted a better-than-expected set of 2QFY14 earnings. Net earnings came in at S$808m, up 2% QoQ and 3% YoY. This was better than consensus forecast of S$764m based on Bloomberg. The slight variance between our estimates and the actual was largely due to higher Other Operating Income but this was offset by higher impairment charges. Net Interest Margin (NIM), which picked up in 1Q14, eased off slightly to 1.71%. Fee and Commission Income was slightly below expectations and saw YoY and QoQ declines to S$410m. An interim dividend of 20 cents was declared; ex-date is 19 Aug, and payable on 28 Aug 2014.

Expecting margin to maintain at current level; China’s exposure is manageable

Management is expecting margin to hover at current level, and does not expect any major deterioration. While challenges remain for both the retail and commercial banking businesses, management is looking to rein in costs. Despite recent market concern about a slowdown in China, management is still exploring opportunities there. Its total exposure to China has grown from $24b as of last year to around $29b currently, but appears to be manageable as the majority of its exposure is related to interbank activities or trades, and generally has durations of less than a year. For the wealth business, its AUM has also grown to $76b currently and this unit remains a key and growing contributor.

Upping FV to $23.87

We have made some adjustments to our FY14 estimates, largely to account for the higher 2Q Other Operating Income. In line with the recent re-rating for banking stocks in Singapore as well as the region, we have also raised our valuation parameters. Based on 1.3x book, we are increasing our fair value estimates from $22.40 to $23.87. At current price, we are maintaining our HOLD rating. We will be buyers at $22.50 or lower.

Source: OCBC Research - 1 Aug 2014