UOB had a good start to the year, reporting 1QFY13 net profit of SGD722m (+5% y-o-y; +4% q-o-q). While this was 7% and 5% ahead of our and consensus full-year estimates respectively, when annualised, we consider the results to be within expectations as the numbers were helped by some lumpy fee income relating to corporate deals. Management guided for slower growth ahead as such income levels revert to a more normalised run rate.

1QFY13 net interest income was slightly soft, down 4% y-o-y but flat q-o-q, mainly due to NIM pressure (-28bps y-o-y; -6bps q-o-q) from lower average asset yield (-36bps y-o-y; -10bps q-o-q). Yield on customer loans fell 30bps y-o-y and 11bps q-o-q, which Management said was mainly due to chunky, lower-yielding corporate loans during the quarter. Apart from that, the Singapore mortgage book continues to dilute yields, but this was to a lesser extent ("few bps" impact). Yield on the securities portfolio was also down q-o-q as well (-33bps y-o-y; -15bps q-o-q) due to the refinancing of the securities portfolio. In mitigation, funding cost was down 7bps y-o-y (-3bps q-o-q) as UOB turned to cheaper, wholesale funding, which led to a rise in the LDR (87.3% from 84% at end-2012). Loan growth was also robust (+13% y-o-y; +7% q-o-q), partly due to chunky, short-term corporate loans. Singapore loan growth was strong due to the corporate loans (+16% y-o-y; +9% q-o-q) while the regional countries grew by a slower clip of 10% y-o-y (+2% q-o-q).

Looking ahead, Management expects the Singapore mortgage book to continue putting pressure on yields for another two quarters. NIM in Malaysia is also under pressure from funding cost. These, however, would be cushioned by higher margins from the Thailand and Indonesian operations with margins in these countries having stabilised. NIM would also be supported by a rising LDR. Management appeared comfortable to allow the LDR to rise up to 90% as UOB taps the wholesale market more aggressively. Finally, group NIM should also benefit once the lumpy corporate loans are repaid/refinanced, although this would also impact loan growth.

1QFY13 non-interest income enjoyed strong growth, up 12-13% y-o-y and q-o-q underpinned by better fee income (+25% y-o-y; +17% q-o-q). Loan-related fee income (+28% y-o-y; +62% q-o-q) benefited from the corporate-related deals and helped push fee income to a new record quarter of SGD453m. Nevertheless, management admitted such levels would not be sustainable and guided for a more normalised run rate of SGD350-400m/quarter. Apart from that, fund management and investment-related fee income also chalked up healthy growth. With that, 1QFY13 operating income rose 3% y-o-y (+5% q-o-q) while non-interest income contribution increased to 42.3% in 1QFY13 vs. 1QFY12: 38.7%; 4QFY12: 39.3%.

Overheads were well under control, up 3% y-o-y mainly due higher personnel costs but down 3% q-o-q due to seasonal expense accruals in the previous quarter. 1QFY13 cost-to-income ratio (CIR) was broadly stable y-o-y at 41.6%, but down from 45.2% in 4QFY12. Pre-provision operating profit for the quarter was up 2% y-o-y and 12% q-o-q.

1QFY13 loan impairment allowances increased 26% y-o-y but were down 13% q-o-q, with the allowances largely relating to collective allowances set aside for the strong loan growth. Total loans credit charge, however, was largely stable y-o-y and q-o-q at 30bps. Management said that asset quality remains intact with no signs of systematic deterioration thus far.

Annualised gross loan growth was 29%, ahead of the high single-digit guidance and our 8% assumption. Nevertheless, Management kept to their guidance, explaining that about half the growth (q-o-q) was caused by the lumpy corporate loans, which are short term in nature. Loan growth in Singapore is also expected to moderate ahead, while growth in Malaysia has been muted. Growth in Thailand and Indonesia, however, are expected to remain healthy.

Meanwhile, total customer deposits expanded by an annualised pace of 14% (+12% y-o-y). Current account, savings account (CASA) growth was a robust 30% (+14% y-o-y), annualised, while the cheaper wholesale funding meant that UOB did not need to compete aggressively for fixed deposits (4% annualised growth; +14% y-o-y). With the stronger q-o-q CASA growth, CASA ratio improved to 42.2% from 40.6% at end-2012. Also, with UOB tapping the wholesale funding market more aggressively, group LDR rose q-o-q to 87.3% from 84% at end-2012.

Asset quality improved further with absolute gross non-performing loans (NPLs) down 5% q-o-q to SGD2.2bn while the gross NPL ratio improved to 1.3% from 1.5% as at end-2012 (end-Mar 2012: 1.4%). Cumulative allowances were 131% of total non-performing assets (NPAs), up from 122% as at 31 Dec 2012. Finally, UOB disclosed Basel III CET-1/Tier 1/Total capital ratios of 14.3%/14.3%/18% respectively. Tier-1 and Total capital ratios were 14.7% and 19.1% respectively as at end-2012, based on Basel II.

No change to our earnings forecasts.

We have raised our fair value to SGD24.20 from SGD22.60, which takes into account the following: i) upgraded target one-year forward P/BV multiple of 1.5x (1.45x previously). This is in lieu of the ample liquidity following easy monetary policies globally, which is positive for riskier assets; and ii) a roll-forward in our book value to June 2014, from Dec 2013. UOB has got off to a good start to the year and we think there is a good likelihood that NIMs have bottomed out for the year. Over the longer term, we think the Group is well positioned to benefit from Asean's rise as a new growth haven. Note that UOB has stronger presence in key Asean countries relative to its peers. Buy call reiterated.

Source: OSK