• 2Q14 net profit of S$808m up 2.5% q-q and 1H14 net profit of S$1.6b forms 56% of our FY14 forecasts, beating expectations this quarter on slightly higher than expected loans growth and lower than expected expenses
• NIM fell 2bps q-q to 1.71% in line with our expectations and management continues to expect margin compression to persist in the near future
• Continue to like UOB’s overall resilient earnings profile, strong capital position and cautious business approach
• Interim dividend of 20 cents per share has been declared
• Maintained at "Neutral”, with an adjusted TP of S$24.10 based on a revised FY14E BVPS of S$16.60 and P/B of 1.45X

What is the news?

UOB announced its 2Q14 results on 31 Jul 2014. Net profit grew q-q to S$808m (+2.5% q-q), beating our expectations slightly on higher than expected loans growth and lower than expected expenses. Net interest income grew 1.3% with loans growth of 2.4% and NIM softened slightly by 2bps. We had previously expected FY14F NIMs to be 1.71% and our view remains unchanged. Fee income once again missed our estimates and was largely flat q-q. Non-interest income was a surprise as it grew 18.3% q-q due to increased investment income. Credit quality continues to be benign at 1.2% NPL ratio. The uptick in impairment charges was due to a few select isolated accounts in Thailand and Singapore but management does not consider this to be systemic. Loans growth continues to be broad based and is on track towards high single digit growth y-y for FY14.

How do we view this?

Management continues to be concerned on funding pressures in Indonesia and they are spending efforts to grow quality deposits which resulted in NIM compression from their Indonesia segment (-21bps). We like that UOB is still focusing on diversifying their funding base with wholesale funding like commercial papers (USD) to match the short duration of trade loans. As mentioned in our previous sector reports, we had believed that the liquidity coverage ratio (LCR) would be a better measure of liquidity than LDR. UOB has guided that they are comfortably meeting the LCR requirements for both SGD and other currencies. We remain unchanged in our view that UOB will continue to maintain their stable earnings profile and growing their overseas contribution but we pare down on our initial optimism of high double digit growth in their fees and commission for FY14. Impairment coverage remains very strong and asset quality remains robust. We have revised our FY14 estimates slightly (EPS +2%) on lower provisions while our other forecasts remain intact as results are largely in line.

Investment Actions?

We revise our forecast slightly upwards to reflect lower than expected provisions for 1H14. Our FY14E NIM remains unchanged at 1.71% as we had anticipated slight NIM compression from overseas funding pressures. Based on our revised FY14E BVPS of S$16.60, and revised P/B of 1.45X at their 5 year mean, we derive a target price of S$24.10, an upward revision of our previous TP. Based on the current share price and limited upside, we maintain our rating at “Neutral” despite strong fundamentals.

Source: Phillip Securities Research - 1 Aug 2014