UOB should reverse YTD 10% underperformance against STI as the stock re-rates due to fading away of capital call probability following a 1.4% pt increase q/q in Tier 1 ratio to 12.3%. We continue to believe that the bank gets benefit of regulatory forbearance in form of exclusion of AFS losses from CAR calculations. But given that the benefit has persisted for two of the most volatile quarters, and part of losses are now reversing, we do not expect this issue to remain a concern.
Bank revenues should benefit from better than expected margins and a resilient fee income. Pricing power should lead to consistent increase in loan spreads and higher loan-related charges, while low rate environment should result in further increases in CASA deposit mix. As in the case of 1Q09, a combination of steeper yield curve and buoyant capital markets would also bring about ALM gains, though this remains a volatile revenue source.
We are factoring in a protracted asset quality cycle as staying power of firms would be tested in a low-growth environment, especially SME. We also expect consumer NPLs to rise along with rising unemployment. We assume 135bp of provisions for 2009E, declining to 100bp in 2010.
Significant and sustained decline in interest rates, leading to lower deposit spreads and NIMs, higher than expected credit costs and a negative turn in treasury income are key risks to our view.
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