Since the improvement in fair value of its AFS portfolio in 1Q09, UOB’s book value has reversed upwards from $8.90 to $9.37. Having the highest equity composition in its AFS investment portfolio (~10%) compared to its peers, UOB will be the prime beneficiary of the sharp rebound in equity values. The increase in equity prices globally (e.g. the MSCI world equity index was +19% since Apr and +39% since the low in March) points to further marked-to-market upside for UOB’s book value.
UOB’s well-managed asset quality is evident in the slight 6% qoq increase in its non-performing assets relative to a >20% jump at peers level in 1Q09. While specific provisions eased in 1Q09, the group has doubled up on its general provisions to buffer against the downturn. With coverage of 105% on its non-performing assets and a CAR ratio of 17.3% (highest in Singapore) that way exceeds regulatory requirement, UOB will be in good shape to emerge the crisis as a stronger player.
There are great opportunities for the group to expand its market share in the local SME segment where it has already carved a niche. SME lending in Singapore will stay buoyant backed by the government’s initiatives to undertake majority of the lending risks up to 80%. The government-backed loans in May have surged more than 400% from Jan. Besides, the recent resurgence in demand on private residential properties bodes well for UOB, which focuses on the private residential segment.
UOB’s share price underperformance (year-to-date) presents a good buying opportunity. Our target price is revised up to $17.10 pegged to 1.6x FY10 PBV (1.47x FY09 PBV previously) in line with its recovery PBV cycle. We are upgrading UOB to BUY.
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