UOB's profit growth to be skewed towards regions outside Singapore

UOB concentrates on intra-regional flow business.

According to Barclays, while loan growth and the margin outlook for the sector remains sluggish, UOB's strategy of focusing on regional ASEAN growth markets outside Singapore will continue to drive earnings growth.

UOB (OW) remains Barclays' top pick among the Singapore banks, with the highest ROE, 11.5%, and dividend yield, 4%.

Here's more from Barclays:

4Q12 results beat expectations: UOB reported FY12/4Q12 net profit of S$2.8bn/S$696m. 4Q12 profit was 4% and 13% above our and Bloomberg consensus estimates, respectively.

The beat was largely due to: 1) strong fee income, especially in funds management and credit cards; and 2) very low tax expenses due to some one-off adjustments. Credit quality was healthy overall and the rise in individual impairment in 4Q was due to a single loan in an OECD country.

Margin pressure: Net interest income was slightly lower than expected due an 8bp q/q drop in margin to 1.76% due to market factors (funding costs rose and interbank yields declined) and management's conservativeness (loan to deposit ratio fell and investment securities duration was shortened due to a flat yield curve).

Loan growth of 2.2% q/q was led by retail (+5%) and housing (+4%) loans. Indonesia loans rose 3% q/q on a constant currency basis (but were affected by -2.3% IDR depreciation against the S$ on a reported basis). US$ loans contracted by 2.3% q/q, bringing the US$ LDR down to 83% (86% in 3Q).

Outlook for FY13E: Management guides for FY13E loans to grow at a "high single digit" rate (8.3% in FY12) and for margins to remain under pressure in the next few quarters.

Loan and profit growth will be skewed towards the ASEAN region outside of Singapore, in line with management's strategy of concentrating on intra-regional flow business. FY12 PBT contribution from Indonesia, Malaysia and Thailand rose to 26% from 22% in FY11.

Highest dividend payout and strongest core Tier 1 among local peers: UOB declared a 70c/share dividend for the full year. The payout ratio was 41%, the highest among the 3 Singapore banks.

With a fully loaded Basel III core Tier 1 ratio in excess of 12.4%, we believe UOB can comfortably maintain its current dividend payout level.