UOB: Outlook is looking better

Equity market gains and buying frenzy in the local property market. Earlier, we were concerned that higher impairment charges could drag down the performance of the local banking sector. While it was indeed a drag on 1Q09 earnings, other aspects of its operations were less affected than expected. In addition, with the recent pick-up in global equity prices and the still active transactions on the local property front, the outlook is definitely better than a quarter ago. The higher property transaction volumes in the 2Q09 should augur well for loans growth. Latest Urban Redevelopment Authority (URA) numbers showed that private resale deals jumped to 1464 units so far in 2Q, up an encouraging 71% from the 856 units in 1Q. Responses to new recent new property launches have also been good. In addition, sharp gains in the equity market since March has also led to more capital market exercises to raise funds as well as the possibility of a revival in the IPO market later on in the year.

Leading the pack with highest P/B ratio. Together with the market rally, UOB's share price hit a recent high of S$15.70, but has since eased with the current market correction. However, it has proven to be the most resilient among the three banks, as seen from its only 8% decline from recent high versus 10-12% for the other two banks. In addition, UOB has also moved ahead of the pack with its consistently higher P/B ratio (see Exhibit 1). Since 2002, it has constantly led the pack with a higher premium in terms of price to book. As an indication, its average from 2002-2009 was 1.58x versus 1.51x for OCBC and 1.34x for DBS (source: Bloomberg). This premium has remained even during the recent peak (in 2007) as well as the recent trough (1Q 2009).

Raised fair value to $14.70. Overall, we are retaining our FY09 earnings estimates for now, including our assumptions of stable margin for Singapore but expecting still challenging overseas markets. However, we are heartened by the re-rating for the Singapore equity market. In line with the more optimistic outlook, we have also raised our peg to 1.5x book, bringing our fair value estimate to S$14.70. As such, we are upgrading the stock to a HOLD. Yield is decent at 4.2% based on Friday's closing price of S$14.40. Accumulate at S$14.00 or lower.

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