UOB’s net profit up 3.8% to S$636m in 2Q11

UOB reported 2Q11 net profit of S$636m, up 3.8% QoQ, in line with expectations. Net interest income rose 6% sequentially, whilst non-interest income fell 4.9%. Loans expanded 7% QoQ, building on the 6.9% recorded in 1Q11, which we view positively. The recent loan strength suggests UOB has turned more aggressive in lending, whilst keeping its low-risk housing loan share higher than peers. We maintain BUY and raise our target price to S$22.40, pegging it to 1.55x 2012 book, versus the 1.65x 2011 book previously. Our lower P/B target reflects increased global market concerns.

Strength in regional loans. UOB’s 7% sequential loan growth was largely driven by financial institutions, which rose 11% or S$2.2b sequentially. YTD loan expansion of 14.3% was driven by regional countries rising 15.6%, a rate faster than that in Singapore. Management is guiding for FY11 high-teens loan growth, and we are forecasting 19% growth.

NIM of 1.92% was 2 bps wider QoQ, due to the change in asset mix from excess funds deployment. Deposits collected ahead of loans in previous quarters were re-deployed to higher-yielding customer loans. We are forecasting FY11 NIM of 1.93%, which is slightly higher than the 2Q11 level.

Non-interest income fell 4.9% QoQ. Whilst fee and commission income rose 2.2% sequentially, there was a sharp decline in gains from financial instruments measured at fair value. This segment of income is expected to remain volatile.

An interim dividend of 20S¢ was declared. The script dividend scheme will not be applied to the interim dividend. We see this reflecting its confidence to meet the MAS capital requirements.