UOB - New Target S$18.60; Raising EPS Estimates 2%-20%

Target S$18.60 (1.76x '09E P/B): On the back of high 2Q09 provision charges, UOB has sold off 9% from recent highs. But despite annualized provisions of 188bps of net loans, UOB still reported a 2Q09 ROAE of 12.8% Our pro forma analysis suggests that UOB could achieve a 15% ROAE with provisions of 50bps. Two-thirds of 2Q09 charges were general provisions, which could fall rapidly if the economy improves. Our 12-month target has been reset to a P/B multiple of 1.76x vs. a 2009E ROAE of 13%.

2Q09 pre-provision profit a record S$937m: UOB's 2Q09 PPOP is up 18% vs. 2Q07 (the last economic cycle peak). Loan growth +23% over 2 years has driven net interest income growth of 19% on improving NIMs. Basic bank fees remained steady, other income has been lifted by investments gains. Operating costs are up just 3% vs. 2Q07, for a 2Q09 cost-income ratio of 36%.

2Q09 provisions 188bps, overly conservative? NPLs rose to S$2.5bn for a still reasonable 2.5% NPL ratio. Mgmt reiterated that there were a few lumpy NPLs, but no trend asset quality deterioration. We expect NPLs to peak by end- 2010E, and provisions to return to "normalized" levels by 2011E, but markets should price in normalization well ahead of that.

Raising 2009-11E EPS estimates 2-20%: We project EPS growth of +17% in '10E and +21% in '11E on [1] 2-7% loan growth; [2] NIMs easing to 233bps; [3] PPOP ROAA of 1.9%, [2] provisions falling from 130bps in '09E to 50bps in'11E. Our 2009E forecast of S$1.9bn is 9% above Bloomberg consensus.

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