Synopsis: The sharp 22bp rise in NIM and continued strong loan-related fee income came as positive surprises. We remain positive on UOB – it’s best bet against any further deterioration in the US subprime crisis.

1Q08 Performance Snapshot
UOB reported a 2% y-o-y rise in net profit to S$529m for the first quarter of 2008. This is about 5% higher than the 4Q07 results. The results were in line with our full year net profit forecast of S$2.2bn. Although funds management and investment related income fell by 50% or more compared to 4Q07, loan and trade related fees were better than expected. The much sharper 26bp q-o-q increase in net interest margins to 2.20%, a record high not seen in the last 16 quarters.

The group’s investment in CDO was further reduced to S$268m, of which S$82m were in asset-backed securities and the rest in corporate CDOs. An important point to note is that UOB has made another S$43m provisions (S$18m SP and S$25m GP) in 1Q08 for its ABS CDO exposure. Together with past provisions, this means that UOB’s total exposure to the ABS CDOs has been fully provided for.

Results Analysis
1.Net interest income grew by 15% over 4Q07 and 12% over 1Q07. The strong q-o-q growth came on the back of a 26bp rise in net interest margins and a close to 2% q-o-q loan growth while the y-o-y growth was driven mainly by loans which grew by 18%. The sharp NIM improvement in 1Q08 over 4Q07 was due mainly to tighter liquidity conditions in the market and a steepening in the yield curve. We believe loan margins are likely to stay high until the tight credit liquidity is resolved when more international banks are willing to lend.

2.Non-bank customer loans reached S$96.3bn as of 31 March 2008, 2% higher than end-2007 (below industry’s 7% growth) and 18% higher than a year ago base (vs industry’s 24%). Though overall loans growth lagged behind industry’s, UOB’s housing loans continued to grow, just a shade above industry growth rate, a reflection that it has yet lose market share in this loan segment. Except for commerce sector loans which grew at only half the industry’s rate, UOB saw across the board growth in other loan segments, in line with the industry.