United Overseas Bank

Kim Eng on 8 Nov 2012

Still a SELL. 3Q12 results may have come in 7-8% above our forecast and consensus respectively, but this was mainly due to a one-off spike in associate dividends. Stripping this out, results would have been within expectations. Headwinds this quarter took the form of a larger than-expected compression in NIM and higher NPLs. We see little reason to revise our Sell call and prefer DBS for exposure. Rolling
forward valuations, our TP is trimmed to SGD17.10 (-1%) on a lower prospective P/BV target of 1.1x (from 1.2x), factoring in slower growth prospects and lower ROEs of 11.5% in 2013 vs 12.2% this year.

A beat but… 3Q12 net profit of SGD707m (+35% YoY, -1% QoQ) was a beat, buoyed by one-off dividend income from associates and trading gains. However, QoQ NIM compression (-8bps to 1.84%) was larger than expected and compares against -5bps for DBS. This was due in part to the trimming of its European investment portfolio, but management is also seeing pressure domestically and in regional countries, with guidance for likely ongoing compression into 4Q12 Annualized loan growth was 7.9% and a high single-digit pace is the year-end target. Our forecast assumes 9.5% this year, 8.7% in 2013.

NPLs trending up. 3Q12 saw NPLs spike 18% QoQ due to a corporate transport-related loan outside UOB’s key regional markets. As a result, the group’s NPL ratio jumped to 1.64% from 1.41% in 2Q, while  its loan  loss coverage dropped to 117% from 137% in 2Q12. Management sees stable asset quality into 4Q but we are mindful of the fact that absolute NPLs have been trending up over the past three consecutive quarters in Singapore and Malaysia and are 14% and 9% higher vs end-2011.

Positively, CAR strengthened as management raised SGD1.2b Tier 2 debt during the quarter and supported by lower RWA, as the group pared its European investment exposure. RWCR was higher at 18.3% as a result, while core Tier 1 improved to 12.6% from 12.3% end-June.