Higher impaired loans hits UOB’s revenue momentum in Q2

Its loan-to-deposit ratio is now at 100%.

UOB bested consensus expectations by posting net earnings of $808m in Q2. However, analysts remain skeptical of the stock, as the number of its gross impaired loans (GIL) rose by 11% in the same period.

A report by OSK DMG states that UOB is at risk of weakening revenue momentum and the risk of higher credit costs if impaired loans continue to rise.

According to OSK DMG, “ The dark spots were: i) flattish fee income (2Q14: -1% q-o-q, 6MFY14: -7% y-o-y), ii) a 11% q-o-q rise in gross impaired loans (GIL), and iii) a lower current account savings account (CASA) ratio of 41.5% (2Q14: 43.5%) with a deliberate shift to fixed deposits while its SGD-based loan-to-deposit ratio (LDR) rose to 100% (1Q14: 95.4%).”

Meanwhile, OCBC Investment Research noted that challenges remain for both the retail and commercial banking businesses, and that its total exposure to China has grown from $24b as of last year to around $29b currently.

“Management is expecting margin to hover at current level, and does not expect any major deterioration. While challenges remain for both the retail and commercial banking businesses, management is looking to rein in costs. Despite recent market concern about a slowdown in China, management is still exploring opportunities there,” stated OCBC's report.