United Overseas Bank

Kim Eng on 18 Jul 2012

Maintain SELL. 2Q12 results, due Aug 7, are likely to be softer QoQ, in our view. Some features that we expect include a) stable loan expansion, b) a normalization of trading income and c) QoQ NIM contraction. The stock has outperformed its peers YTD (+22% vs 20% for DBS, 12% for OCBC). However, valuations are no longer cheap, in our view, with the stock trading at a 2012 P/BV of 1.4x for an ROE of 11.5% vs 1.1x for DBS (10.8% ROE) and 1.4x for OCBC (12.2% ROE). Our TP of SGD15.50 (P/BV 1.1x) is maintained.

Lower QoQ. We expect 2Q12 net profit to come in lower QoQ, largely on account of lower trading gains, coming off an exceptional 1Q. We estimate a 1H net profit of SGD1.32b, which implies a net profit of about SGD636m (+6% YoY, -8% QoQ) vs SGD688m in 1Q12. Our 2012 net profit forecast of SGD2.59b is 4% ahead of consensus’ SGD2.49b.

Loan growth stable, NIMs likely contracted. Loan growth expanded 2.6% QoQ in 1Q12 and we expect the same (+2-3%) in 2Q as well. Growth for the year is likely to trend towards our forecast of 11.9%, which would be marginally slower than management’s mid-teens expectation earlier this year. UOB saw its NIM improve by 3 bps QoQ in 1Q12. With stiff competition, we expect NIMs to have contracted QoQ, largely on account of lower Malaysian NIMs. We do nevertheless expect a slight 3-5 bps improvement for the full year from a low base.

Trading gains to normalize. Tightening bond spreads led to large trading gains in 1Q12, which are unlikely to be of similar quantum in 2Q. UOB saw its trading income jump 22% YoY to SGD232m in 2Q12 and we expect this to normalize in 2Q12.

Liquidity is paramount and to this end, loan/deposit ratios (LDR) have been capped at less than 100% across the region and even USD LDR (88%). With its AA rating, UOB has seen strong demand for its fixed income issuances at competitive pricing as well, thus ensuring a stable flow of liquidity for the group.