Published October 29, 2008

A lot riding on UOB's Q3 results

By SIOW LI SEN
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BANK investors are probably approaching this Friday with some trepidation. United Overseas Bank (UOB) will be reporting third-quarter results, the first of the three local banks to do so. UOB is often regarded as the best managed bank here, so any surprises on Friday will lead to further hammering of prices for bank stocks - which have already been trading near or below book value.

Treading cautiously: UOB is likely to set aside more provisions, which will affect its bottom line

But even if there is nothing untoward in UOB's financials, it is probably too early to think the worst is over, in terms of price levels. 'I don't expect anything earth-shattering from UOB,' said Hugh Young, managing director of Aberdeen Asset Management. For sure, the results will be scrutinised to see if UOB has 'slipped on any banana skins, which we don't think they will have', he said.

Aberdeen Asset Management holds chunky amounts of UOB and OCBC Bank, which count among its larger holdings in Singapore, said Mr Young. Total assets under management are north of US$30 billion. Analyst Pauline Lee of Kim Eng Research too is not expecting surprises this Friday. Ms Lee has forecast UOB to post Q3 net profit of $576 million, up 15 per cent from a year ago and 4 per cent lower than the second quarter.

She said UOB has the least exposure to CDOs or collateralised debt obligations as it has provided for up to 100 per cent for its ABS (asset-backed securities) CDOs - which are regarded as the most toxic CDOs - and 50 per cent of its non-ABS CDOs.

Among the three local banks, UOB's total exposure to CDOs was also the lowest, according to Q2 reports. UOB's total CDO exposure was $264 million against DBS's $1.455 billion. OCBC said its CDO exposure was $589 million.

During the bank's Q2 results presentation in early August, UOB deputy chairman and CEO Wee Ee Cheong had already warned of difficult times ahead. He said loan growth would slow down but expected spreads on loans to widen.

'The past six months have been challenging, and it's not going to be any easier as global institutions seek ways to rebuild their balance sheet and economies cope with slowdown and inflation,' Mr Wee said. The outlook was 'conservative', with a moderation in loan growth expected, he said.

Observers say UOB's third-quarter performance will be pretty much intact as the economic slowdown would not have worked its way yet into the bank's earnings. While Singapore has already entered a technical recession, there have been no major layoffs yet or reports of many companies suffering big losses. In fact, UOB will likely show solid loan growth, healthy margins and a low non-performing loans ratio. But UOB is likely to set aside more provisions - to prepare for more losses as the recession gets into full swing next year - which will affect its bottom line.

Singapore's economy fell into a recession in the July-to-September period, the country's first since 2002, as manufacturing activity and exports slumped. The Monetary Authority of Singapore (MAS) said the economy is expected to grow about 3 per cent this year, with inflation hitting 6-7 per cent in 2008 before easing to between 2.5 and 3.5 per cent in 2009.

With such a prognosis, Q3 results might turn out to be the best showing before the real bad news comes in the next several quarters. As Matthew Wilson of Morgan Stanley said: 'While we believe UOB is the best placed of the Singapore banks to navigate the credit cycle, it cannot avoid it.' If there is some kind of relief from the Q3 results, and bank stocks rally, some shareholders may want to take the opportunity to sell, said Mr Wilson.