Weak fee-based income, which fell by 38% yoy, was offset by the resilient lending business and a $92m net gain from trading and investment activities. Net interest income grew on the back of margin expansion and loans growth across regions. Going forward, we remain upbeat on UOB’s lending business as it will be one of the key beneficiaries of the government’s recent initiatives to boost SME lending.
Impairment charges in 4Q08 more than doubled to $381m due to specific losses on loans and debt securities from overseas. At the same time, higher collective impairments were provided to buffer against the global economic uncertainty. While impairment charges are set to rise, the management is confident to survive the downturn as stress tests indicates that their portfolio are resilient. Moreover, with a strong CAR that was well above regulatory requirements, the management sees no compelling reasons for capital raising at this juncture.
Book value has shrunk from $10.91 to $8.90 over the year, mainly due to a near $3bn decline in available-for-sale reserves. Any further mark-to-market losses of its investment-grade bonds investments (which is worth some $16b) that will be taken into the reserves could continue to reduce the book value in the near-term.
We have lowered our FY09 and FY10 earnings estimates by 5-9% to reflect higher provisions. Our target price is cut to $9.10 based on FY09 book value per share (assuming lower magnitude of mark-to-market losses in 2009). The group recommended a final dividend of 40 cents per share, in line with its regular dividend payout. UOB’s earnings remain at risk as credit deterioration deepens. Maintain Hold.
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