UOB bound to win intra-regional loan market share

Malaysia, Thailand, and Indonesia are good prospects.

Barclays believes UOB will continue to win intra-regional loan market share and leverage its diversified ASEAN footprint. While not immune to margin pressure, we believe UOB will focus on enhancing fee income from loans, investments, trade, wealth and its cards business.

Here's more from Barclays:
Despite slowing economic and credit growth in Singapore, growth in the rest of the ASEAN region remains relatively strong, driven by solid domestic consumption and government spending.

Our economists expect GDP in Malaysia, Thailand and Indonesia to grow by 4-6% in FY13E, faster than 3% projected for Singapore. UOB has the most diversified ASEAN footprint and is best placed to continue to win intra-regional loan market share.

Malaysia, Thailand and Indonesia currently account for nearly a quarter of its total loan book. However, we note that at the group level, because of strength in the SGD vs USD and other key currencies (THB, MYR and IDR), UOB may suffer from currency translation losses, despite strong underlying growth.

Slight downward earnings revision
We revise down our FY12-14E profit estimates by 2-9% to reflect weaker domestic loan demand in Singapore and margin pressure (another 7bp q/q decline in 3Q12E).

Despite this, we believe UOB can continue to deliver strong fee income and capture solid momentum in regional trade and its wealth management business.

UOB our top pick among the Singapore banks
Based on our unchanged valuation methodology, we lower our 12-month price target to S$21.10 (from S$22.00) and reiterate our OW rating. Trading on 1.2x FY13E P/B for 11.6% ROE, we believe UOB is undervalued.

Key downside risks include: 1) worse-than-expected margin deterioration from intense loan pricing competition and slowing corporate activity; 2) pick-up in credit costs as asset quality deteriorates quicker than expected (SMEs ~20-25% of total loans).

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