Expect flattish NIMs going ahead.  UOB&rsquo s NIM was down 1bps in 1QFY16 to reach 1.78% (versus 1.79% in 4QF15), as the increase in average rate earned on its assets (up 9bps qoq) was offset by a similar increase in its cost of funds (up 8bps qoq). While the recent surprise shift by the Monetary Authority of Singapore (MAS) to a neutral policy stance of zero percent appreciation could have positive implications for Singapore&rsquo s domestic interest rates (SIBOR/SOR), SIBOR/SOR has been weakening in recent weeks instead, which could cap NIMs in the near term. We expect any potential improvement to come from a more efficient funding mix as the bank copes with the slower pace of interest rate hikes by the U.S. Federal Reserve.

Weighed down by non-interest income.  Non-interest income was disappointing in 1QFY16 as UOB saw its fee and commission income fell 4.5% yoy (9.8% qoq) to reach SGD433mn in 1QFY16. Contributions from wealth management was hit the hardest, with income falling from SGD110mn in 1QFY15 to SGD81mn this quarter, a hefty 26.1% decline. While we expect non-interest income to rebound in the next quarter on the back of better market sentiments compared to 1QFY16, we believe overall non-interest income contribution for 2016 would likely be weak as market conditions remain volatile.

Maintain hold with TP unchanged as we stay cautious on UOB&rsquo s near-term performance.  While UOB remains a defensive play among its local peers with its lower exposure to both China and the commodities sector (as of last year), we believe potential upside may be limited due to the weaker loan growth and expected flattish NIMs in 2016.

Key downside risks  include deterioration in asset quality, sustained low interest rate environment and worse than expected economic data.

 

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Yuxuan HE
Analyst
Research Department 

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