UOB: Downgrade on valuation grounds

UOB rallied 40% from 2009 trough. Since our last report on 2 March 2009 where we recommended accumulating at less than $9.30, UOB hit a 2009 low of S$8.07, but rallied 40% recently to a high of S$11.32. While the worst appears to be over for the equity market, the same cannot be said about the local economy. Recently, Singapore's 2009 growth was revised down to a range of -6% to -9%. Over in the US, while equity prices rallied in recent weeks, the economic numbers continued to show weakness, and high unemployment rate remains a concern. Valuations for the STI are also starting to look a bit stretched, especially in view of expected dismal 1Q and 2Q earnings. Recently, there was also a spate of smaller-cap companies in Singapore issuing profit warnings and all these point to still bearish operating environment. Against this backdrop, we expect provisions for banks to be a key item to watch out for in the upcoming results of the three banks. UOB and OCBC will be releasing 1Q results on 6 May 2009, while DBS will be issuing its 1Q report card on 8 May.

High impairment charges. In 4Q08, UOB posted higher than expected impairment charges of S$381m, more than doubled 3Q08's level of S$158m, and the highest of the three banks. For 1Q09, we expect impairment charges to remain high for the three banks, and project charges of S$280m for UOB, +215% YoY and -26% QoQ. Overall, we are expecting 1Q net earnings of S$316m, down 40% YoY and 5% QoQ.

Maintain fair value of S$9.30, but cutting to SELL. We continue to like UOB for its healthy asset quality and its continual profitability. However, with the global economic recession and the resultant weakness in the Singapore economy, trading activities will decline sharply and hurt earnings for the banks. This will be seen in higher NPLs and high impairment charges. This will also mean that for the medium term, share price appreciation may be capped until a more convincing return to sustained profitability and a bottoming-out is seen for new NPLs. We are maintaining our earnings estimates and retaining our fair value estimate of S$9.30, but downgrading to SELL purely on valuation as we see limited near term price upside and possible near term weakness at the current level.

Sponsored Links

Related Posts by Categories