United Overseas Bank

Kim Eng on 10 May 2012

Sell maintained. 1Q12 results were above our expectations and consensus, largely as a result of higher-than-expected trading income and slightly higher net interest margins (NIM). Our overall forecasts are raised by 5-6% for 2012/13, while our TP is revised upwards to SGD15.50 from SGD14.20 (+9%) on a higher P/BV target of 1.1x (1.0x previously). Trading at a P/BV of 1.3x for an expected 2012 ROE of 11.5%, much is already in the price.

Net profit up 12% YoY, with positive momentum on net interest income (+15% YoY) and non-interest income (+14%) offset by higher overheads (+16%) and a higher tax rate. Trading income surprised on the upside due to gains on investment sales while NIMs were better-than-expected on account of improved lending yields.
Higher NIM, slower loan growth. Annualized loan growth of 10% was below the mid-teens guidance for the year. Key markets Singapore and Malaysia saw still healthy annualized loan expansion of 13% and 21% respectively but lending in Indonesia and Thailand contracted while Greater China annualized loan growth moderated to just 8% from +59% YoY in 2011. The focus has primarily been on preserving NIM and the positive is that NIMs improved 3bps QoQ to 1.98%, with expansion across most markets except Malaysia (-20bps QoQ). Management is of the view that further improvements will be challenging.

Managing liquidity. Managing liquidity has been a priority and while the overall loan/deposit ratio (LDR) has crept up to 86% from 83% end-Dec, USD LDR has come off to a more comfortable 83% presently as a result of USD funding raised during the quarter.

Forecasts raised 5-6%, largely to incorporate higher NIM and trading income assumptions. The offset, however, is that expenses will likely continue to rise at a faster pace due to ongoing talent investment, while credit charge rates are expected to pick up in the following quarters.