UOB reported FY08 net profit of S$1.94b, down 8.2% YoY. This is in line with our S$2.01b expectation.


Operating profit remains robust. Net interest income may have expanded a relatively robust 20% to S$3.58b, but this was largely offsetted by the 11.5% contraction in non-interest income to S$1.68b. Fee and commission income was a key contributor to the income weakness, falling 14.3%. Though operating profit rose 12.1%, this was largely negated by the 169% surge in impairment charges for loans and other assets. Consequently, PBT declined 9.6%.

A final dividend of 40S¢/share was declared, giving full year dividends of 60S¢/share, or a 47% payout ratio. Management guided future payout ratios of around the same quantum.

We are assuming the Dec 09 NPL rate to rise to 3.7% (from Dec 08's 2.0%), factoring in deteriorating economic conditions. Consequently, we have assumed FY09 provisions to hit 72bps of interest bearing assets, versus 51bps for FY08. Our FY09 provisions assumption of S$1.05b is 30% higher YoY, and 19% higher than our earlier projection of S$880m.

We lowered our FY09 net profit forecast by 9% to S$1.54b (from earlier S$1,69b), due to (1) our raised FY09 provisions assumption of S$1.05b; and (2) our lowered FY09 fee and commission income of S$974m, which is 12% below our earlier projections of S$1,104m.

UOB's book has fallen from Sep 08's S$9.96/share to Dec 08's S$8.90, due primarily to the fair value losses for available-for-sale instruments. This has led to a cut in our Dec 09 book forecast. Our target price is lowered from S$14.30 to S$11.60, which is derived from 1.2x 2009 book, a slight premium to its Mar 03 low of 1.1x P/B.