UOB

Kim Eng on 24 Feb 2012

UOB (UOB SP) – Improved liquidity
Previous day closing price: $18.40
Recommendation –Sell (maintained)
Target price – $14.20 (maintained)

Sell maintained. UOB’s 2011 earnings were broadly within expectations, with core net profit down a marginal 4% YoY to $2.3b. While management remains upbeat about a recovery in margins, we are less sanguine at this stage, on expectations that any NIM recovery in Singapore is likely to be offset by compressions in countries in the region where UOB has a presence. Our overall forecasts are broadly maintained, as is our target price of $14.20 (P/BV of 1x, ROE of 10.9%).

2011 results within expectations. UOB’s 2011 earnings were within expectations, at a marginal 4% below our forecast and in line with consensus. Operating profit expanded a decent 16% QoQ in 4Q, but the overall impact was offset by higher impairment charges during the quarter, resulting in a 3% QoQ decline in pretax profit.

The positives are that a) margins expanded 6bps QoQ due to better yields on interbank lending and securities; b) the group’s liquidity position has improved, with a loan/deposit ratio of 83% at end-December 2011 and a more manageable US$ loan/deposit ratio of 99% (125% in 3Q); and c) NPLs dipped in 4Q11 having ticked up in 3Q.

Management remains upbeat and guides for mid-teens loan growth in 2012 (+25% YoY in 2011). Other targets include sustaining a cost/income ratio of 43% (43% in 2011) and for NIMs to improve on the back of the ability to price in liquidity premiums. Management also hopes to hold loan/deposit ratios at 83-85%. A primary area of focus is in driving contribution from its overseas wholesale business to 50% of group profit by 2015, from 38% presently.

European exposure reduced. Total investment exposure to Europe stood at S$1.58b at end-December (7% of shareholders’ funds), down from S$2.63b at end-June (12% of shareholders’ funds). This was largely achieved through disposals and CDS protection.