Should investors be thrilled at UOB's positive margin surprise?

Remain cautious, analysts warn.

UOB surprised market watchers with an unexpected net interest margin (NIM) expansion in the first quarter. UOB's NIM rose 7 basis points quarter-on-quarter in Q1, while OCBC and DBS both recorded NIM contractions.

Krishna Guha, equity analyst at Jefferies Singapore, noted that UOB's NIM expansion might not be sustainable.

"We do not think the increase will be sustainable and for the full year FY15, margins will be at similar level to last year (170bps). This is because of lagged repricing of the SGD funding base and our view that wholesale loans will be difficult to price up given weak loan demand. The downward pressure will be offset to some extent by gearing up of USD loan book (USD LDR at 58%)," Guha reported.

CIMB analysts Kenneth Ng and Jessalyn Chen echo this sentiment, noting that UOB's loan growth will slow as the year progresses.

"Given that its US$ LDR has fallen to 58% (4Q14: 68%), there is room for expansion of its US$ loan book. However, overall loan growth guidance for the year has been adjusted down to the lower end of the 5-10% range as the focus will be on protecting margins instead of chasing loan growth," they noted.

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