A strong set of results. Margins were significantly ahead, fee and non-interest income did well, cost control was exemplary, and the bank boosted loan loss reserves through a large general provision. Loan book was flat overall as expected, but within that, UOB grew domestic S$ loans gaining market share in Singapore.
A big positive surprise was that Tier 1 CAR went up sharply (12.3% from 10.9% in 4Q08) thanks to a combination of lower risk weighted assets and a reversal of MTM losses on equities that were hurting Tier 1. This reduces equity dilution risk, in our view.
UOB is trading at 1.5x P/B FY09E versus a 15-year average of 1.6x. Our target price of S$16 (from S$12) is based on 1.6x P/B assuming a 10-11% sustainable ROE and an 8% cost of equity. We have bumped up earnings estimates by 23-24% due to higher revised margin and non-interest income assumptions.
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