Q-o-q performance. 1Q09 net profit grew 23% to S$409m, driven by non-interest income and lower expenses. NIM was robust at 2.4% but 4bps lower due to narrower average loan spread. Non-interest income improved 11%, supported by higher investment and fee income. Expenses were lower while cost-to-income ratio was 36%. Specific provisions were lower, but collective impairment continued to rise to S$174m (+64%) as expected. NPL ratio inched up to 2.1% from 2.0%, while absolute NPLs rose 6%; specifically, Singapore and Thailand registered higher NPLs. By industry, increases were seen in Manufacturing and general Commerce. UOB’s Tier 1 and Total CAR rose 1.4ppt and 2.0ppt to 12.3% and 17.3%, respectively.
Expect NIM to hold up, but selective in lending. We expect NIM to hold up as loans get re-priced at higher yields. Loans will grow, specifically from Singapore, but we believe that UOB will be selective about lending. We are retaining our loan growth assumption of 6%.
Upgrade to Buy, TP S$16.50. UOB had underperformed its peers and the market due to impairment to book value. But it should be able to steer away from this setback now, given that credit markets have stabilised. Upgrade to Buy. We roll forward our valuation window to FY10F to derive a higher target price of S$16.50, based on the Gordon Growth Model. This also implies 1.6x FY10F P/BV, which is the normalised mid-cycle multiple.
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