UOB’s profit slumps 18% to S$522m in Q3 2011

Earnings below expectations due to weak trading and investment income. UOB reported 3Q11 net profit of S$522m, down 18% QoQ, which is lower than consensus forecast of S$595m. The weakness was largely due to the decline in trading and investment income consequent to less favourable market conditions. The market may be disappointed with the weak 3Q11 earnings, but we note the strong 7.1% QoQ loan growth, which was mainly driven by regional loans.

NIM was also less compressed than DBS. Whilst we NEUTRAL weight banks, we like UOB, which we feel has a higher asset quality due to its less aggressive lending stance (than peers) over the past few years. We downgrade target price to S$19.20 (pegged to 1.4x FY12 book), as we lowered our forecast FY12 book following lower fair value reserves from the available-for-sale investment portfolio.

Strength in regional loans. UOB’s 7.1% sequential loan growth was largely driven by a 22% (or S$1.6b) jump in Greater China loans. Malaysia loans also grew a strong 10% (or S$1.8b) QoQ. Management said that loan approvals have fallen sharply in 3Q11, but earlier approvals could help to sustain loan growth till 1Q12. They are guiding for FY12 loan growth of between high single-digit and low teens. We are less bullish and forecast FY12 loan growth of 7.5%.

NIM of 1.89% was 3 bps narrower QoQ, due to NIM squeeze in regional countries, particularly in Indonesia, whose NIM narrowed 40 bps. Singapore NIM was, however, more stable. We forecast FY11 and FY12 NIM of 1.88% and 1.86% respectively, which factors in management guidance of continued NIM pressure in the short term. We forecast a wider FY13 NIM of 1.90%.

We lowered our FY12 net profit forecast by 21% to S$2.25b, largely due to higher provisioning assumptions. We introduce our FY13 net profit forecast, which is lower than consensus also due to greater provisioning assumptions.