Key areas of P&L outperformance: 1) for non-interest income, a S$141mn fair value investment gain (1Q: S$29mn) which mitigated 6% q-q fee income contraction; and 2) an effective tax rate of just 5% in 2Q (1Q: 21%) due to recognition of deferred tax assets. Asset loss provisioning rose 23% q-q due to a near doubling in collective impairment charge – while underlying NPLs rose (gross NPL ratio +30bps, to 2.4%), specific provisioning still declined q-q, with UOB now boasting the higher collective impairment buffer as percentage of gross loans at 1.5% (1.2% for OCBC, 0.9% for DBS).
While weak ex-investments operating income momentum and the desire to maintain large provisioning buffer weighs against positive earnings revision, the large AFS securities book revaluation gain (which is reflected directly in equity) over 1H09 (S$1.2bn) means we will be revisiting our book value forecast with a positive bias.
Our existing Gordon Growth-based price target (methodology unchanged, assuming 13% sustainable ROE, 9.5% cost of capital and 5% long-term growth) is S$18.00, implying 1.8x FY10F adjusted book value (1.5x stated book) and 12.5x FY10F earnings. With a large, export-biased SME exposure (25% of group loan book), sustained negative trade data trends would accelerate delinquencies in this portfolio. In a similar vein, UOB’s offshore operations (collectively around 35% of group operating income), being centred on the export-dependent Southeast Asian region, would be vulnerable to related macro events, in our view, adversely affecting sovereign creditworthiness and raising the potential for economic dislocation and sentiment-damaging measures, such as capital controls. This would negatively impact earnings expectations and UOB’s premium P/BV multiple over its less geographically diverse domestic peers.
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