United Overseas Bank

DBS Group Research, Feb 17

UNITED Overseas Bank's (UOB) net interest margin (NIM) inched up the most against peers (+3 basis points q-o-q), mainly from improved asset yields. Non-interest income traction came largely from loan-related fees and credit cards. Expenses were higher due to staff costs and business-related expenditure. Provisions were higher q-o-q (largely specific provisions), with credit cost stable at 30 basis points as expected. Tax rate was significantly lower in Q4 2013 from tax recoveries.

NIM fell 15 basis points y-o-y while loans grew 17 per cent y-o-y. Deposits were slower at 11 per cent. Non-interest income was flattish; growth was driven by fee and commission income but offset by lower trading income and lower gains from sale of securities. Specific provisions were significantly lower y-o-y; but were offset by higher general provisions, in line with strong loan growth and requirements in certain operating countries, particularly Thailand. Associate income was higher from sale of investments.

Management guided for single-digit loan growth (we are forecasting high single digit), while NIM trends could be challenged by deposit competition. Non-interest income is expected to grow at double digits, while provision charge-off should remain at 30 basis points. Regional growth plans will be organic. Post 2013 earnings, we raise 2014-15 forecast earnings by 4 to 5 per cent after adjusting for NIM and loan growth.

Upgrade to "buy". Our revised target price of S$22.50 is based on the Gordon Growth Model (12 per cent return on equity, 5 per cent growth and 10.1 per cent cost of equity). We expect UOB to outperform OCBC in the near term with no M&A dilution risk. Our preference is switched to UOB from OCBC.

BUY