- Poor earnings quality: Earnings beat expectations on volatile investment income.
- Key negatives: Weaker-than-expected NIM, deteriorating SGD funding profile and a slight erosion in asset quality.
- Maintain HOLD; no change to our earnings forecasts and TP.
2Q14 core PATMI of SGD808m (+2.5% QoQ, +3.2% YoY) beat our and consensus estimates, boosted by lumpy investment income of SGD118m. This implies weak earnings beat. Key positives: 1) broad-based and decent loan growth of 2.4% QoQ, or 11.7% YoY, and 2) strong USD deposit growth of 4.0% QoQ, or 32.6% YoY.
Discouraging trends surfacing
First, net interest margin (NIM) came in weaker than expected at 1.71% (-2bps QoQ, flat YoY) as asset yields compressed by 5bps QoQ, or 4bps YoY. Second, there was a slight deterioration in asset quality with non-performing loans rising to SGD2.3b (+11.2% QoQ, +7.3% YoY) emanating from Thailand (one large corporate account), Indonesia (two accounts) and Singapore (housing loans). Third, SGD deposits contracted sequentially to SGD105.7b (-3.4% QoQ, +2.6% YoY), taking SGD loan-deposit ratio to 100.1% (Mar 2014: 95.4%, Dec 2013: 95.3%). Management attributed this to its tactical move to focus on quality deposits. In our view, this merely reflects UOB’s weaker deposit franchise.
Of the three Singapore banks, UOB stands to benefit the least from rising interest rates considering its weakest deposit franchise, characterised by lowest cheaper funding ratio of 41.5% at end-June (DBS: 56.2%, OCBC: 47.3% as of Mar 2014) and highest SGD loan-deposit ratio of 100.1% (DBS: 72.8%, OCBC: 78.8%).
We maintain our TP at SGD25.70, based on 13x average FY14E and FY15E EPS, consistent with its historical mean since Jan 2005.
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