• Net earnings came in ahead of consensus
• Management cautiously optimistic
• Retain BUY, drops FV to  S$24.20

3Q14 earnings of S$866m was better than expected

UOB delivered 3Q14 net earnings of S$866m, up 19% YoY and 7% QoQ, higher than Bloomberg’s poll of S$736m. The variance was chiefly due to better-than-expected Fee and Other Incomes, which led to a 7% QoQ or 32% YoY jump in 3Q Non-interest Income to S$816m. However, this was partly mitigated by higher impairment charges, which almost doubled YoY or +8% QoQ. For the 9-month period, total impairment charges amounted to S$469m, up from S$290m a year ago. This was due to some non-performing accounts in Singapore, Thailand and Indonesia. Although overall group NPL ratio was stable at 1.2%, Singapore and Indonesia saw increases in QoQ NPLs. In Singapore, this was largely housing-related, in particular for high-end residential project in Sentosa. Net Interest Margin (NIM) held stable at 1.71% in 3Q14. For Fee income, strong double-digit growth rates were seen for its fund management, investment-related and loan-related activities.

NPL may have stabilized

Management is cautiously optimistic about its prospects, in particular on wealth management and fee income, while mindful of the slowdown in China and the rest of Asia. On the NPL front, while some areas showed some weaknesses, the situation appears to have stabilized. On NIM, it expects margin to hover at current levels, with some possibility of pricing up in the short term for its loans book. We expect the current disciplined cost management measures to remain in place with cost-toincome ratio of 41.8% in 9M14 and likely to end the year slightly above 42%.

Retain BUY, but lowering FV from S$25.00 to S$24.20

Since the start of Oct, and with the lowering of global economic growth forecasts (including projections by the IMF), market sentiment has weakened, especially with the more cautious outlook for the region. In tandem with this, banking stocks’ valuations have similarly eased off. Taking the softer outlook into consideration for both our earnings projections and valuations, we are lowering our fair value estimate for UOB from S$25.00 to S$24.20. With a dividend yield of 3.3% and medium term potential total return of 11%, we are retaining our BUY rating.

Source: OCBC Research - 31 Oct 2014