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Brokers' take: UOB stock down 3.4% as NIM disappoints

UNITED Overseas Bank's net profit rose 17 per cent to S$1.04 billion for the third quarter, broadly in line with street estimates.

But weaker net interest margins and quarter-on-quarter results sent the bank's shares 3.41 per cent or S$0.85 lower to S$24.10 before the lunch break.

UOB's third-quarter net profit represented a fall of 4 per cent from S$1.08 billion for the second quarter, as credit costs rose marginally, offsetting a 4 per cent rise in net interest income. Non-interest income also fell 13 per cent on a year-on-year basis.

JPMorgan analysts wrote on Friday morning that UOB's earnings missed their estimates by 3 per cent, as the bank suffered its second straight quarter of falling net interest margins (NIM). NIM declined by two basis points to 1.81 per cent for the third quarter, from 1.83 per cent for the second quarter and 1.84 per cent for the first quarter. 

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Analysts led by Harsh Wardhan Modi wrote on Friday morning that a correction was likely: "This miss should lead to negative revisions and likely downgrades by the street, leading to underperformance in the near term.

"Despite the near term underperformance, we remain overweight on UOB as we expect it to benefit from the rising rate cycle. Read-through for DBS and OCBC is not great, but higher mortgage rates at these two banks and letting go of US dollar deposits should lead to better outcome on NIM than UOB. We stay with our preference for DBS/OCBC versus UOB."

Goldman Sachs (GS) analysts led by Melissa Kuang wrote: "Results were in line with our expectation on most operating metrics. Margin surprised slightly to the downside though net interest income was supported by strong loans. Asset quality improved quarter on quarter... We believe the key focus would be how UOB thinks about NIM and the top-line outlook amid the market volatility."

Net interest income was in line with GS estimates, and strong loan growth for the quarter was driven largely by Greater
China and less by other geographies, the analysts wrote. But non-interest income was slightly below estimates, and trading and investment income was weak, due mainly to lower gains from structural foreign exchange positions, they added.

In its results filing, UOB explained the quarter-on-quarter dip in NIM: "With the expectation of further interest rate increases, the group built up deposits during the quarter to ensure that its funding position remains well placed to meet
projected business growth." 

GS explained: "Higher deposit costs more than offset the increase in loan yield."