UOB's 3QFY13 net profit of SGD730m (+3% y-o-y; -7%  q-o-q) was in line with our and  consensus  expectations,  despite  9MFY13  net  profit  of  SGD2.2bn  (+6%  y-o-y) accounting for 78% of our and consensus full-year estimates. We expect a softer 4Q on account of lower lumpy gains from sale of investments.

3QFY13  net  interest  income  was  decent,  up  3%  q-o-q  and  8%  y-o-y  with  the  rise driven by higher asset volume. NIM was stable q-o-qas the pressure on asset yield (-3bps q-o-q) was offset by lower funding cost (-3bpsq-o-q). UOB's ability to hold NIM stable  was  all  the  more  impressive  considering  that deposit  growth  had  outpaced loan growth during the quarter (see below). Averageloan yield fell 6bps q-o-q, which management  attributed  to  a  combination  of  adverse  forex  translation  impact  and stronger growth in lower-yielding corporate loans. The lower loan yield, however, was partly offset by stronger yield on its securities portfolio (+7bps q-o-q) thanks to higher yields from its investments in government securities regionally. Y-o-Y, 3QFY13 NIM was down 13bps as asset yield compressed by 26bps y-o-y due to the low interest rate environment.

Looking ahead, management expects NIMs to hover around current levels. UOB has been  repricing  up  its  new  mortgages  and  this  has  started  to  have  an  impact  in stabilising yields from the consumer segment. However, UOB is not lengthening the duration of its securities portfolio just yet and for NIMs to rise, short term rates will need to go up as well.

3QFY13 non-interest income softened 2% q-o-q with fee income 7% lower q-o-q at SGD407m.  Nevertheless,  this  was  still  above  the  normalised  quarterly  run  rate  of SGD350-SGD400m  that  management  guided  previously.  Trading  and  investment income, however, was up 20% q-o-q as UOB booked in  a SGD40m gain from the disposal  of  its  investment  in  Pan  Pacific.  Excluding  this,  trading  and  investment income  would  have  been  down  11%  q-o-q  due  to  tougher  market  conditions stemming  from  potential  Quantitative  Easing  (QE)  tapering  by  the  US  Fed.  Y-o-Y, non-interest income was down 11% as trading and investment income slipped 41% y-o-y,  cushioned  by  stronger  fee  income  (+9%  y-o-y).  Overall,  3QFY13  operating
income rose 1% q-o-q (flat y-o-y) but non-interest  income contribution decreased to 37.1% vs. 2QFY13: 38.2%; 3QFY12: 41.6%.

Overheads  were  generally  under  control,  down  2%  q-o-q  but  up  4%  y-o-y. Consequently,  3QFY13  cost-to-income  ratio  (CIR)  improved  q-o-q  to  43%  as compared to around 44.2% in 2QFY13 but was higher than the 41.3% in 3QFY12. As a result, 3QFY13 pre-provision operating profit rose 4% q-o-q but was down 3% y-oy. Despite the stronger pre-provision profit, 3QFY13 net profit was lower q-o-q due to: 1)  impairment  charge  of  SGD29m  on  other  assets  vs.  impairment  writeback  of SGD52m in 2QFY13. Loan allowances, however, were lower at SGD56m (2QFY13: SGD127m);  and  2)  weaker  contribution  from  associates  and  joint  ventures  due  to lumpy  investment  gains  recognised  in  2QFY13.  Y-o-Y, it  was  the  reverse  with  net profit up 3% despite the weaker pre-provision profit due to lower impairment on loans and other assets (-30% y-o-y) and higher contribution from associates (+148% y-o-y). As expected, gross loan growth momentum eased further to +2% q-o-q (+16% y-o-y) vs. 2QFY13: +3% q-o-q (+15% y-o-y). Sequential growth was driven by Singapore (+2%  q-o-q),  Greater  China  (+7%  q-o-q,  mainly  due  to  loans  to  Hong  Kong corporates) and Others (+6% q-o-q). South East Asiamarkets such as Malaysia and Indonesia saw loan base (in SGD) contract 1-8% q-o-q mainly due to adverse foreign currency translation effects. For the full-year, management retained their guidance of low to mid-teens loans growth.

Meanwhile,  total  customer  deposits  growth  outpaced  loans  growth,  up  4%  q-o-q (+13% y-o-y) led by fixed (+7% q-o-q/+13% y-o-y) and other (+7% q-o-q and y-o-y) deposits.  By  currency,  q-o-q  growth  was  driven  by  SGD  and  USD  deposits. Consequently, group loan to deposit ratio (LDR) declined to 88.3% from 89.9% as at end-2QFY13  (end-3QFY12:  86%)  while  SGD  and  USD  LDR  were  91.7%  (end-2QFY13: 95.1%) and 84.4% (end-2QFY13: 89.1%) respectively. Current account and savings account (CASA) deposits stayed flat q-o-q (+13% y-o-y) and hence, CASA ratio declined to 40.5% from 42.2% as at end-June '13 (end-3QFY12: 40.5%). UOB was the only banking group that reported an improvement in asset quality, with absolute  gross  NPL  and  NPA  down  2%  (-16%  y-o-y)  and 3%  q-o-q  (-17%  y-o-y) respectively. Part of the improvement was attributed by UOB to currency effects on the regional subsidiaries. Thus, the gross NPL ratio improved by 5bps q-o-q to 1.19% while cumulative allowances were 141% of total NPAs, up from 137% as at 30 June 2013. Management said there were no signs of systemic asset quality issues at this juncture.

Finally,  UOB  disclosed  Basel  III  CET-1/Tier  1/Total capital  ratios  of 12.9%/12.9%/16.3%  respectively  as  at  end-Sept  2013. This  were  down  about  70-90bps  as  compared  to  end-June  2013  with  the  decline mainly  due  to  higher  risk weighted  assets  (+5%  q-o-q  vs.  total  assets  that  stayed  flat  q-o-q).  Management attributed the rise in RWA to continued loan growthand a one-time realignment for the computation of market risk.

Other briefing highlights 
Looking ahead to 2014, UOB sees loan growth of around high single to low double digit (vs our 6% assumption). Growth in housing loans, however, is expected to slow down, especially in 2H2014, with loan approvals currently down by 30-40% from a year ago. The drop appears to be sharper than peers, who both reported a decline of 30% y-o-y. Management  remains  comfortable  with  the  Thai  and  Indonesian  operations,  citing comfortable  funding  positions  and  asset  quality  trends.  For  Thailand,  UOB  is targeting to penetrate the supply chain of multi-national companies and to grow its business  outside  of  Bangkok.  For  Indonesia,  management  said  that  the  group  will maintain its deposit pricing discipline and hence, will pace loan growth accordingly.
Finally, while UOB remains open to potential M&A activities, management stressed this will only be done at the right price and if there are synergies to be reaped. While Hong Kong is an attractive market to capture China  flows, management highlighted that  this  will  need  to  be  weighed  against  the  steps China  is  taking  to  liberalise  its economy (eg Shanghai Free Trade Zone).

Risks 
The  risks  include:  i)  slower-than-expected  loan  growth,  ii)  weaker-than-expected NIMs, iii) weaker-than-expected capital market activities, iv) a deterioration in asset quality, and v) adverse impact from rising bond yields on the securities portfolio.

Forecasts 
No changes to our earnings forecasts.

Valuation and recommendation 
We  tweak  up  our  FV  to  SGD24.50  (from  SGD24.40),  after  rolling  forward  our valuation  base  year  to  end-2014  (previously  June  2014)  and  reducing  our  target P/BV multiple to 1.45x from 1.5x. Our new 1.45x P/BV, which is a similar target P/BV multiple  that  we  ascribe  to  OCBC  (OCBC  SP,  NEUTRAL, FV:  SGD10.90),  is  at  a slight discount to the stock's five-year average P/BV multiple of 1.5x, to reflect the potential impact ahead from the slowdown in mortgage approvals, which appears to be  sharper  than  peers.  On  balance,  UOB  did  manage  to  report  some  decent underlying trends this quarter, such as stable NIMsand further improvement in asset quality.  Over  the  longer  term,  we  think  the  group is  well-positioned  to benefit from Asean's rise as a new growth haven. Reiterate BUY.

Company Profile 
UOB is the second-largest Singapore bank by loan. It also has significant operations in Malaysia, Thailand & Indonesia.

Source: OSK