UOB: Stillbuilding up reserves

Mild upside surprise. 2Q09 net profit of S$470m (+15% q-o-q) was driven by non-interest income and one-off recognition of deferred tax assets. Collective impairment continued to rise while specific provisions edged down. Provision charge-off rate up to 1H09 was 87bps (63bps from collective impairment). NPL ratio inched up to 2.4% led by manufacturing, general commerce and financial institution sectors. NIM compressed by 6bps due to lower asset yields and interbank rates, coupled with 2% loan contraction q-o-q. Deposits shrank 2% q-o-q with lower fixed deposits, and loan-to-deposit ratio was flat at 84%. Capital ratios were higher due to lower risk weighted assets. An interim 20 cents DPS was declared.

Lower FY09F earnings, but raised FY10F/FY11F. We raised our collective impairment assumption, which raised over-provision charge-off rate for FY09F to 108bps, from 85bps. We raised NIM by 10bps, but reduced loan growth to 3% for FY09F. Non-interest income is raised to reflect improved capital market activities. All in, we cut FY09F earnings by 4%, but FY10F/FY11F earnings are raised by 13%/27% mainly due to lower provisions. We also revised estimated book value to reflect the adjustments to its AFS portfolio.

Maintain Buy, TP raised to S$18.60. UOB’s result is less impressive than OCBC’s, but we believe the key catalyst to UOB’s valuation lies in the normalization of its book value. In the longer term, UOB’s ROE of 13% stacks up better than its peers, hence our preference for UOB over OCBC. Our revised target price of S$18.60, based on the Gordon Growth Model, implies 1.6x FY10F P/BV (mid-cycle valuation).

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