UOB - 1Q09 profit S$409m inline; improving book value and tier-1 ratio

1Q09 S$409m (vs. Citi S$410m): Net interest income -1%qoq as NIM fell slightly on flat loans, but non-interest income (+11%qoq) was stronger than expected on improved fees and investment gains. Provisions remained high at an annualized 150bps of loans, but due to conservative general provisioning. Rising book value (S$9.37/share) and tier-1 ratio 12.3% should allay concerns of capital raising.

1Q09 profit S$409bn (4Q: S$332m), +23%qoq: 1Q09 NII S$949m -1%qoq: Loans flat qoq, NIM 241bps (4Q: 245bps). Loan-to-deposit spread 3.07% (4Q: 3.19%), LDR 85%. Non-II S$434m, fees S$240m (+5%qoq, higher loan fees), rent, dividends S$38m, other income S$156m (+28%qoq) on higher investment gains. Costs S$491m -8%qoq, as staff costs fell 6%qoq on lower headcount, and grants received under Jobs Credit Scheme, other expenses fell 10%. Provisions S$378m (4Q: S$381m). NPL ratio 2.1%, coverage c100%. Tier-1 ratio 12.3% (4Q: 10.9%, lower risk assets), Total CAR 17.3%. 1Q09 annualized EPS S$1.01, BPS S$9.37 (4Q: S$8.90).

1Q09 Provisions S$378m (annualized 150bps of loans). S$169m in specific allowances (-7%qoq), S$174m set aside for general allowances (+67%qoq), and S$34m impairment for other investments. Although provision charges remain high, 1Q09 has a higher proportion of general provisions, which we regard as conservative.

Investment securities portfolio and CDOs. As of Mar-09, UOB had S$15.8bn in investment securities, with (86%) in debt securities, and 14% in equities. Of the S$13.6bn debt securities, about 53% comprised of bank capital securities, of which 1.5% exposed to US banks. Total Mar-09 CDO exposure S$142m; S$19m ABS CDO (100% provided), while S$123m corporate CDO book is 99% provided.

Price spike to 1.47x P/B post good 1Q09 result: while cautious on the economic outlook, UOB seems confident on navigating the downturn, capturing loan opportunities on robust margins, while managing modestly rising NPLs through conservative provisioning. A strong book value and tier-1 capital pickup should allay investor fears of capital raising. UOB spiked 29% so far this week; its valuation now just shy of its 1.53x P/B cycle mean, suggesting greater evidence of economic recovery may be needed to justify a stronger re-rating.

Outlook. With overseas markets suffering from yield pressures, UOB is likely to focus on Singapore for growth. Corporate/SME loan spreads have improved over the last six months, and govt-scheme SME loans will likely draw down in 2Q/3Q. NPLs are rising but on a modest up-trend; mgmt remains comfortable with property exposures. A change in valuation of debt securities to mark-to-model and firmer equity markets have reduced concerns of further AFS losses.

1Q09 profit S$409bn (4Q: S$332m), +23%qoq: 1Q09 NII S$949m -1%qoq: Loans flat qoq, NIM 241bps (4Q: 245bps). Loan-to-deposit spread 3.07% (4Q: 3.19%), LDR 85%. Non-II S$434m, fees S$240m (+5%qoq, higher loan fees), rent, dividends S$38m, other income S$156m (+28%qoq) on higher investment gains. Costs S$491m -8%qoq, as staff costs fell 6%, other expenses fell 10%. Provisions S$378m (4Q: S$381m). NPL ratio 2.1%, coverage c100%. Tier-1 ratio 12.3% (4Q: 10.9%, lower risk assets), Total CAR 17.3%. 1Q09 annualized EPS S$1.01, BPS S$9.37 (4Q: S$8.90).

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