UOB - Rights issue risk has diminished

We admit that UOB’s 26% QoQ increase in total NPLs for the final quarter was disconcerting, but we believe it would be premature to conclude that its asset quality will underperform those of its peers, considering that its credit growth has been the most restrained among the local banks. Chairman Wee Cho Yaw (during UOB’s annual meeting with shareholders on 29 April) argued that profitability is more important than having the highest NPLs in the sector. However, he also cautioned that there would be more bad loans.

We believe the possibility of an imminent rights issue has diminished greatly after Wee Cho Yaw said that UOB does not need a rights issue and is comfortable with its current capital and it is being careful with loan growth.

UOB’s NPL rate rose the sharpest quarter-on-quarter, to 2.0% at the end of December, from 1.5% at the end of September. We expect a more gradual increase for 1Q09, but believe UOB shares risk a further de-rating if its NPL growth outpaces that of the sector again.

UOB’s shares trade above our zero-growth DDM value of S$8.98, including a final FY08 dividend of S$0.40 (ex-date: 7 May 2009). Our new target price is equivalent to 1.01x book (December 2008). UOB’s previous PBR troughs occurred in 2003 (1.11x) and 1998 (0.54x).

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