UOB must brace itself for profit loss

A 6% decline looms.

According to CIMB, it expects UOB to report core net profit of S$668m (+28% yoy, -6% qoq) when it reports on 7 November.

Here's more from CIMB:

We expect UOB’s net profit to fall the most sequentially as its 2Q had strong, broad-based fee strength and treasury, which will set a high base to beat.

For NII, UOB’s business loans have slowed, like peers. Regional ASEAN loan growth still looks alright but the strong Greater China loan growth in 2Q might not repeat.

Indonesia, however, is seeing growth in its commercial banking portfolio at almost double the rate of 2011. Part of 2Q’s margin squeeze was caused by a higher mix of loans in low-yield markets (Singapore and Hong Kong).

As the mix switched back, it could support group NIMs slightly, compensating for lending yield pressure regionally and funding cost pressures ahead. Margin guidance is for contraction but milder than in 2Q.

On the funding side, there is increased competition in Singapore and Malaysia, notably from foreign banks. In Singapore, UOB has the highest dependence on time deposit funding and also the highest S$-LDR (90% vs. OCBC 80%, DBS 68%).

No doubt there is still excess liquidity in the system but as system loans outpace deposit growth, we believe that UOB will be the first of the local banks that will need to react to a tightening S$-system eventually.

On non-interest income, UOB is not a play on capital market-related fees as is evident in its weaker positions in both equity issuance and debt issuance. UOB does have a role in the Thai Beverage deal, however (probably reflecting its oft-quoted ability to lend regionally and win roles), but that will not contribute in 3Q yet.

Nonetheless, this does not mean that its non-interest income drivers will be weaker than peers. In 2Q, UOB’s investment-related income did well on the back of strong bancassurance sales from its successful tie-up with Prudential.

We think that this is a sustainable fee business and should recur. Trading and investment could show reasonably strong gains that may match 2Q levels. Last quarter’s gain on UOB’s AFS portfolio (2Q: S$131m vs. 1Q12: S$151m) came from gains on the SGS portfolio and the unwinding of its European securities portfolio.

SGS bonds have traded higher in 3Q, although gains have been more muted. European debt, however, has done well in 3Q and would have provided the window for UOB to further pare down its legacy EU bank debt exposure.