Non-interest income improved 11.1% to S$434 mil, mainly due to higher other operating income from non-trading activities. Operating expenses fell 7.7% over the quarter to S$491 mil due to lower staff expenses and a grant received under the Jobs Credit Scheme, lower revenue related and IT related expenses. Expense to income ratio improved 3.9% to 35.5%. The Group took a total of S$378 mil impairment charges due to higher collective impairment provisions of S$174 mil but lower individual charges of S$169 mil. NPLs increased to S$2.19 bil while the NPL ratio is higher at 2.1% over the quarter. Cumulative impairment as a percentage of NPL moderated to 104.9%.
Net loans remained flat at S$99.7 bil (+5.6%yoy, -0.2%qoq), with growth in the overall portfolio negated by strong contraction in the manufacturing sector. Tier 1 and total capital adequacy ratio improved to 12.3% and 17.3% respectively due mainly to lower risk-weighted assets and higher retained earnings.
Key risk is loans growth Singapore total loans contracted 0.54% in the first quarter of 2009 and UOB’s loan book remained flat following a contraction in the previous quarter. And as we think that since loans growth is closely tied to the economy and MTI projects that Singapore may contract from –6% to –9%, we fear that it is probable that system loans will contract in 2009 and will impede UOB’s loans growth. Borrowers draw down credit lines to tide over liquidity crisis rather than capital expansion and growth.
Moody’s revises UOB’s outlook from stable to negative for the bank financial strength ratings. Moody’s has also revised the Aa1 long-term deposit and debt ratings from stable to negative. Reasons cited include deterioration of asset quality and earnings due to the global economic downturn, weak demand of loans and other banking-service products.
Recommendation Given this unprecedented economic crisis and the factors stated above, we are cutting our 2009 earnings by 13.6% from S$1.92bil to S$1.66bil. Accordingly, we adjust our target price to S$14.60; peg to 1.52x FY09 NAV. Given the strong advancement of the share price within last week, we think upside maybe limited. We maintain our HOLD rating.
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