UOB net interest margin under mounting pressure

The all-important bank performance and profitability measure could dip another 2bps.

DBS Vickers noted that NIM had declined 6bps q-o-q in 2Q12 as UOB loans expanded in low-NIM markets such as Singapore and Hong Kong instead of southeast Asian markets such as Indonesia, Malaysia and Thailand where NIM is stabilizing.

Here's more from DBS Vickers:

NIM pressured. NIM had dropped 6bps q-o-q in 2Q12 due to loan expansion in Singapore and Hong Kong. Although it is competitive in Hong Kong, management sees its Hong Kong operations as the gateway to UOB China’s business. NIM in Indonesia, Malaysia and Thailand have stabilised.

Fee income shone. Fee income, particularly from loan-related and investment-related income, had driven revenues. Similar to peers, UOB also saw a decline in trading income. Asset quality remains stable. Overall provisions were flat but general provisions had doubled to S$32m while there were further specific provisions in Singapore believed to be related to the shipping sector. At this juncture, management stated that necessary provisions have been made and specific provisions should decline in the coming quarters.

Our View. Slower 2H12 expected. Management has guided loan growth in the high single digit. We have trimmed our loan growth assumption to 10% (previously FY12F: 12%; FY13-14F: 11%). Growth will continue to come from Singapore and Hong Kong vs other regional operations, hence near term NIM will remain under pressure. The current traction of fee income should remain sustainable.

Earnings increased in FY12F; trimmed for FY13-14F. With expectations of fee income being sustainable for the year despite lower loan growth, we have raised FY12F by 4%. FY13-14F earnings are lowered by 3% mainly due to lower loan growth and a 2bps decline in NIM forecasts.