UOB (DMG)

Promising growth prospects in Indonesia (BUY, S$19.40, TP S$22.00)

We visited management of UOB Indonesia (UOBI) in Jakarta, and came out optimistic on its growth prospects there. We believe UOB’s strategy to grow its overseas operations in Malaysia, Thailand and Indonesia is in the right direction. Maintain BUY on UOB with target price of S$22.00, pegged to 1.65x FY11 book. UOB remains our top pick within the banking sector.

Indonesia operations to grow faster than Singapore. UOBI aims to contribute pre-tax profit CAGR of 30% by 2015. This will be achieved via aggressive customer acquisition in the targeted customer segment of consumer, commercial and corporate.

UOBI to leverage on UOB expertise and name. Whilst Indonesia loans currently account for a small 3.6% of UOB global loans, management intends to grow the Indonesia operations more aggressively. UOBI will leverage on the UOB name and expertise to build its business. UOBI will avoid competing on interest rates, but attempt to offer better services to clients eg improving on channel delivery and speed of approval, etc.

Focusing on savings deposits to fund asset expansion. Strong 2010 loan expansion has led to the loan deposit ratio rising to 97% as of Dec 2010, versus Dec 2009’s 89%. With savings deposits accounting for 26% share of total deposits, UOBI plans to aggressively expand its savings deposits to fund its future asset expansion. There has been some initial success, with deposits rising 30% YoY as of Mar 2011.

Loan growth to offset effects of NIM squeeze. UOBI’s 4Q10 NIM of 6.05% is narrower than 3Q10’s 6.60%, and management pointed to further squeeze going forward, as competition intensifies. However, loan expansion will help to build UOBI’s net interest income. UOBI loan growth will also add to UOB’s global loan expansion.