UOB - Consistent loan growth; regionally driven (DBSVickers)

BUY S$18.80

Price Target : S$ 23.50

At a Glance

• 2Q11 results were inline with ours and consensus

• Earnings were topline driven, particularly net interest income supported by NIM (+2bps) and loan growth (+7% q-o-q)

• 20 Scts interim DPS declared (expected); no scrip dividend

• Earnings marginally adjusted to reflect higher loan growth and lower NIM. Maintain Buy with TP unchanged at S$23.50

Comment on Results

Loan growth was consistently strong at 7% q-o-q driven by manufacturing (+11% q-o-q) and financial institutions (+11% q-oq) while housing loans grew 4% q-o-q. Regional loan growth of 10% outpaced Singapore-only loans of 4% q-o-q. NIM was 2bps higher as excess funds built up across the region were deployed into loans. Non-interest income was dampened by lower trading income, similar to peers. Expenses were higher due to staff and infrastructure costs. Provisions were lower but general provisions still dominated the composition, inline with strong loan growth. NPL ratio improved to 1.5% with a 4% decline in absolute NPLs. Loan loss coverage remains highest vs. peers at 126%. Core Tier-1, Tier-1 and Total CAR, while remained strong, were a little lower as risk-weighted assets grew. Scrip dividend was not applicable for this interim dividend as management felt that capital strength was sufficient to buffer the stricter Basel III rules.

Key takeaways from the analyst briefing

Loan pipeline remains healthy with expectation of high-teens loan growth in 2011, but would likely taper off thereafter. NIM may face downward pressure, as cost of funds remains competitive in the region. As SOR has turned negative, UOB has invoked a market disruption clause for its SOR-based loans (i.e. setting SOR at 0%) to ensure that spreads are maintained. SOR-based loans comprise 30% of its S$ portfolio (S$73bn or 56% of total loans). UOB’s debt securities portfolio has declined from S$16.4bn to S$15.4bn. Its exposure to bank-related debt securities have gradually been switched into higher yielding corporate debt securities, although it has been trimmed down. These remain positively valued on a markto-market basis and management stated that they are comfortable with these credits as additional general provisions on debt securities were set aside in the past. Overall European debt amounted to S$2.6bn in 2Q11 compared to S$2.9bn in 2Q09.

Recommendation

We raised our 2011 loan growth assumption to 18% from 15% (2012/13 unchanged at 10% each) but lowered NIM to 1.92%/1.93%/1.97% for 2011/12/13 (from 1.94%/1.98%/2.05%). Earnings are marginally tweaked by +0.5%/-0.7%/-2.2% over the same period. Maintain Buy with TP unchanged at S$23.50.