By Carmen Lee
Mon, 1 Mar 2010, 08:50:37 SGT

Summary: UOB reported 4QFY09 earnings of S$522m or FY09 earnings of S$1903m. The improvement was largely due to lower-than-expected allowances/impairment charges for loans and other assets, which fell 88% YoY and 81% QoQ to S$44m in 4Q09. Management has also maintained a full year dividend payout of 60 cents (40 cents final dividend). Business sentiment has picked up recently and more mergers and acquisitions are likely in view of the incentives from the recent budget. The business outlook is fairly positive for this year. We are going for FY10 earnings of S$2372m, up 24.7%, largely due to sharply lower projected allowances of S$487m. And reflecting the more subdued mood in the market, we have opted to be more prudent in our valuation metrics. Using 1.5x book, we are raising our fair value estimate from S$17.00 to S$18.20. As current price, we are maintaining our HOLD rating on the stock.

Lower allowances helped 4Q results. UOB reported 4QFY09 earnings of S$522m, +57.2% YoY and +4.3% QoQ, and slightly above Bloomberg estimate of S$503m. This gives full year earnings of S$1903m, down 1.8%. The improvement was largely due to lower-than-expected allowances/impairment charges for loans and other assets, which fell 88% YoY and 81% QoQ to S$44m in 4Q09. As a result of this, total allowances rose only 39% YoY to S$1121m in FY09. Net Interest Income fell 6.9% YoY and 3.6% QoQ to S$892m in 4Q09, while Non-Interest Income dropped 10.4% YoY and 11.6% QoQ to S$351m, giving total income of S$1243m. Non-Performing Loan (NPLs) increased 9.6% to S$2.3b by end 2009, while NPL ratio also increased from 2.0% to 2.2% as at Dec 2009. Net Interest Margin (NIM) was 2.28% in 4Q09, down from 2.39% in 3Q09 and 2.45% in 4Q08. NIM improved from 2.27% in FY08 to 2.36% in FY09. Customer loans were relatively flat at S$99.2 billion as at end-2009.

Targeting high single-digit loans growth. Management is targeting loans growth in the high single-digit region and to deepen its Asian business, and expects the outlook to be better for this year. For loans growth, the primary focus will be in Singapore in consumers and corporates as well as the region for the SME businesses.

Outlook is better. Recently, the Singapore government raised its official forecast for the Singapore economy from 3%-5% to 4.5%-6.5%. Together with the recent Singapore Budget’s focus to grow the SMEs, this is likely to support Singapore’s long-term economic growth expectation of 3-5%. Business sentiment has picked up recently and more mergers and acquisitions are likely in view of the incentives from the recent budget. While property cooling measures were recently introduced, this appears to lightly tamper demand and is not expected to be a drag on demand. Overall, the outlook is fairly positive for this year.

Maintain HOLD, raise fair value estimate of S$18.20. Recent market volatility has dampened equity prices and valuation. We are going for FY10 earnings of S$2372m, up 24.7%, largely due to sharply lower projected allowances of S$487m. And reflecting the more subdued mood in the market due to uncertainties for certain European economies, we have opted to be more prudent in our valuation metrics. Using 1.5x book, we are raising our fair value estimate from S$17.00 to S$18.20. As current price, we are maintaining our HOLD rating on the stock.