UOB banking on higher loan yields

It considers US loans as its primary growth driver and will seek to build up its loan book over deposits.

Loans should keep expanding in the low-teens numbers, according to management, with the only major downside risk seen in its Indonesia market where a possible foreign ownership ruling could complicate matters with its wholly owned subsidiary.

Here's more from DBS:

Strong revenues. Non-interest income was a surprise, with gains from sale of investments (largely equities and government securities), due to improved market conditions. Otherwise results were within expectations. NIM improved across regional operations from higher loan yields, except in Malaysia (c.-20bps).

Robust loans growth; deposits growth was paced. Loans grew by 2.6% q-o-q (driven by consumer loans), vs a contraction in deposits. By currency, S$ and RM loans were on an uptrend while US$ loan traction was sedentary. Deposits only grew in countries where loans increased, i.e. in Singapore and Malaysia. US$ deposits grew by 9% q-o-q as a deliberate measure to build up US$ funding to fuel growth. Other countries (Indo, Thai, “others”) saw both loans and deposits contracting in 1Q12.

Provisions were lower, as expected. Overall provisions halved q-o-q but an uptick in individual impairments was seen in Singapore (shipping) and Malaysia (fraud case). Collective impairments were lower, in line with slower loans growth. 

Focus on increasing NIM. UOB remains hopeful it can continue pricing up loan yields, particularly US$ loans. With the US$ loanto-deposit ratio lowered to 89% in 1Q12 (4Q11: 100%), UOB is comfortable in growing its US$ loan book in upcoming quarters.

Overall guidance unchanged. Management still guides for low-teens loans growth, 42-43% cost-to-income ratio, and 30- 50bps credit charge. There appears to be minimal risk to asset quality while capitalisation remains strong.

Awaiting regulatory decision in Indonesia. As UOB wholly owns UOB Indonesia, the subject of foreign ownership threshold could be an issue should there be changes in these regulations, especially if applied retrospectively. We understand that an announcement pertaining to this regulation could be made in June/July.