• Recent share price decline
• No change in our estimates
• Attractive on valuation grounds

Post results decline in share price

Since touching a recent high of S$25.05 in late Apr 2015, the stock has declined to a recent low of S$22.60. US Federal Reserve Chair Janet Yellen said on 22 May 2015 that she expects to raise rates this year if the economy meets her forecasts for a rebound. However, recent soft economic data seem to point to the possibility of a delay in rate increase. As a result of this, local banking stocks have eased off from recent highs on market concerns that the local banks may not be able to enjoy higher interest margins for this year. On this front, we expect net interest margins (NIMs) to stay relatively flat for the rest of the year from the levels seen in 1Q15.

Outlook remains challenging, but modest growth is still attainable

While the outlook for Singapore is fairly positive for the rest of this year, management has shared during the 1Q results briefing that the environment in Malaysia and Indonesia is challenging. We expect loans growth to moderate from the strong double-digit growth rates experienced in FY01-FY14 to mid-single digit level in FY15. We are also expecting technology and staff costs to remain elevated, but this should eventually be compensated by higher cross-selling of products and services in the region.

Upgrade to BUY

We mentioned in our 1Q results report that a better level to accumulate UOB shares is below S$23.80. As such, recent price weakness has opened up opportunities as we see value emerging. We are projecting earnings compounded annual growth rate (CAGR) of 6% from FY14-FY16 for UOB. Although we are expecting costs to go up, bringing cost-income ratio from the current level of 42% to about 44% by FY16, this will be absorbed by income growth as well as a projected decline in impairment charges in FY16, down from the recent peak of S$635m in FY14. At current price of S$22.80, valuations are not demanding at 1.2x book, 11.0x FY15 earnings and with a dividend yield of 3.3%. We are upgrading UOB to a BUY and maintaining our fair value estimate of S$25.20.

Source: OCBC Research - 5 Jun 2015