UOB net interest margin pressure unlikely to ease soon

Especially on Singapore and Malaysian fronts.

DBS Vickers Singapore said the net interest margin (NIM) pressure that UOB suffered in the first quarter of 2013 will likely to persist as the Singapore market grapples with mortgage re-pricing while the Malaysian market heats up on depositor competition.

Here's the full results and forecast analysis from DBS:

NIM contraction prevails; fee income and lower provisions supported earnings. As expected, NIM fell to 1.7% (-6bps q-o-q; -28bps y-o-y) largely dragged down by asset yields across asset classes alhtough cost of funds declined marginally. Non-interest income was higher led by loan related fees, which were related to corporate deals. Fund management and investment-related fees (includes capital market and wealth management operations). Trading and investment income improved q-o-q but declined y-o-y.

Loan growth skewed to chunky loans. Loans grew 7% q-o-q, 13% y-o-y; excluding a chunky loan, loan growth was at a normalised 3-4% q-o-q. By currency, S$ loans largely dominated loan growth. General provisions increased as expected in line with strong q-o-q loan growth but specific provisions were much lower. NPL ratio improved to 1.3%; loan loss coverage was at 134%.

NIM pressure likely to persist. Management is hopeful to at least keep NIM stable with growth expected to be strong from regional operations particularly Thailand and Indonesia. NIM has so far been stable in these markets. Singapore NIM is expected to remain under pressure mainly from mortgage re-pricing while Malaysian NIM is under pressure because of deposit competition.

Downgrade to FULLY VALUED on valuations; TP unchanged at S$20.10. Current valuations reflect positives in our view. With NIM likely to remain under pressure and credit costs unlikely to go any lower, there are limited nearterm catalysts, which is the reason for our downgrade. The need to push regional growth could help mitigate excessive NIM pressure going forward.

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