Above-expectation earnings, with YoY expansion in net interest income and fees & commissions. UOB reported 3Q12 net profit of S$707m, up 36% YoY, and above consensus expectations of S$658m. The outperformance is attributed to stronger income from financial instruments at fair value, and provisions coming in lower than our forecast. Nonetheless, we rate this a good set of results, on the back of a 6% YoY rise in net interest income and YoY strength in fee and commission income. 3Q12 ROE of 12.1% is also respectable. We raise our 2012F net profit by 9%, largely to factor in the 3Q12 outperformance and lower 4Q12 provisioning. We see UOB capitalising on its regional platform to grow earnings. The results should allay concerns that probably led to UOB's share price underperformance over the past one month. We raised our target price to S$21.60 as we roll over to 2013 financials (pegged to 1.43x 2013 book, a discount to the historical average of 1.57x). Maintain BUY.

Loan expansion stronger from regional segment. Net interest income rose 6% YoY, driven by a 8.6% YoY loan expansion, and offset by a 5 bps YoY
squeeze in NIM to 1.84%. UOB recorded a sequential loan expansion of 1.8%, ahead of DBS' 1% contraction. A 3% QoQ growth in UOB's housing loan reflects UOB's continued focus on this low-risk space. On a YoY basis, regional country loans expanded 11%, outpacing that for Singapore. We forecast 2012 loan growth of 8.5% and NIM of 1.90%. We expect housing loan growth to remain a feature over the next few quarters as drawdown of approved loans take place.

The cost-income ratio of 41.3% is similar to that for 2Q12. NPL ratio rose 0.2 ppt QoQ to 1.6%, and UOB attributed this to a particular overseas loan, which is still paying but of which UOB is concerned with the cash flow. We do not see this NPL rise as a concern.

NIM has narrowed, and continued squeeze seen. Net interest income rose 6% YoY, driven by a 8.6% YoY loan expansion, and offset by a 5 bps YoY squeeze in NIM to 1.84%. UOB said that deposit competition in Singapore has intensified. There is a push for in-country funding and foreign competitors are fighting for deposits. Asset yields have also fallen as UOB has trimmed its holdings of higher-yielding securities portfolio. Hence, UOB expects 4Q12 NIM to remain under compression pressure. We lower our FY12F NIM to 1.90%, from 1.93% previously. We expect some marginal NIM widening in FY13 to 1.92%.

UOB recorded a sequential loan expansion of 1.8%, ahead of DBS' 1% contraction. A 3% QoQ growth in UOB's housing loan reflects UOB's continued focus on this low-risk space. On a YoY basis, regional country loans expanded 11%, outpacing that for Singapore. UOB management guided for FY13 loan growth of high single-digit. We see this driving net interest income.

Fee and commission income rose 15% YoY. The biggest growth came from fund management (+33%) and investment-related (+54%).

Although UOB's total return exceeded its peers over the past 12 months, it underperformed over the past one month. We believe the good set of results will lead to a rerating and UOB share price could recover its 1-month underperformance versus peers.

Source: OSK