Better-than-expected 1Q09 results. UOB delivered net earnings of S$409m, up 23% QoQ but down 23% YoY, though still ahead of market and our estimates. The group was able to maintain its net interest income flat QoQ or +11% YoY to S$949m. With non-interest income of S$434m, total income amounted to S$1384m, up 3% QoQ and 9% YoY. Better fee and commission income and higher other income were the main variants for the better-than-expected results. Total operating expenses fell 1% YoY and 8% QoQ to S$491m, resulting in improved cost-to-income ratio from 39.2% (1Q08) and 39.4% (4Q08) to 35.5% (in 1Q09).

Impairments remained high, close to 4Q level. As expected, total impairment charges were higher, up from S$89m in 1Q08 to S$378m, but down marginally from S$381m in 4Q08. The group has set aside S$174m for loans and investments in view of the global economic uncertainties (versus S$104m in 4Q08 and S$48m in 1Q08), while individual impairment on loans and other assets amounted to S$203m (versus S$276m in 4Q08 and S$42m in 1Q08).

Loans grew, but NPL rising. Customer loans grew 5.6% YoY (flat QoQ) to S$99.7b. NPL increased from S$1602m in 1Q08 and S$2062m in 4Q08 to S$2185m in 1Q09. NPL ratio also rose from 1.6% in 1Q08 to 2.1% in 1Q09. Net interest margin declined from 2.45% in 4Q08 to 2.41% in 1Q09. Total capital adequacy ratio stayed healthy at 17.3% as at Mar 2009.

Raised fair value to $11.78. Equities rallied strongly in the past few days on the green shoots theory despite the H1N1 outbreak (which appears to be more contained than the SARS episode in Asia in 2003). Liquidity in the money market is improving despite earlier stress test concerns. Management expects to be able to price in stable margin in Singapore, but expects challenges in overseas market, especially Thailand. While we continue to believe that UOB's asset quality is healthy, we believe that valuation is high after yesterday's 13% gain, bringing it to 1.5x book. This could mean near-term selling pressure as economic recovery is still unclear. We have marginally raised our FY09 earnings estimate from S$1655m to S$1713m, taking into account the better 1Q earnings but mitigated by higher impairments. We also raised our fair value estimate from S$9.30 (1x book) to S$11.80 (1.2x) book. At yesterday's price of S$14.88, we maintain our SELL rating.