Union Bank of the Philippines surprises with Php7.6b profits in 2012

It's 8.5% higher than analyst's estimates.

According to Maybank Kim Eng, Union Bank of the Philippines (UBP) reported better-than-expected net profits of PHP7.6b last year from PHP6.6b in 2011. This is 8.5% higher than Maybank's own estimate and 2% better than market consensus. The result implies 4Q12 earnings rose 6.8% to PHP1.3b due to a 25% jump in treasury operations income to PHP1.3b.

Here's more from Maybank Kim Eng:

Trading gains account for 38% of revenue. Net interest earnings grew 4.7% to PHP7.3b (in line with our forecast) in 2012 as net loans and receivables climbed 14% to PHP120b. Interest income fell 7.5%, but interest expense plunged 25%, thus the higher core lending income for 2012.

The surprise came mainly from non-interest income, which surged 16% to PHP9.6b, exceeding our forecast by 18%. Trading gains grew 20% to PHP6.5b, representing 38% of gross revenue. Miscellaneous income also jumped 25% to PHP2.4b.

Provision exceeds expectations. Operating cost was on target, rising 8% to PHP7.4b and bringing cost-to-income ratio slightly better at 44% from 45.1% in 2011. Taking advantage of huge revenue gains, UBP set aside PHP1.6b in loan loss reserves, similar to 2011, but a sharp increase from just PHP338m in 9M12. This is also 3x larger than our estimate. At any rate, we believe this eases provisioning requirements this year, giving UBP flexibility to manage its earnings.

DPS raised 17% to PHP3.50. UBP raised its DPS 17% to PHP3.50, more than we were expecting for 2013. This puts dividend payout at 30% of 2012 earnings and translates to a dividend yield of 2.9%, the highest in the sector. Record and payment date will be set upon approval of the central bank.

Share price up 5% YTD, HOLD. UBP share price has jumped 5.2% YTD to PHP118.50/sh. Its recent acquisition of City Savings Bank is expected to improve our 2013 earnings estimate to PHP7.5b (EPS: PHP11.78), but we will be reviewing our forecasts once details of 2012 results become available. For now we maintain our HOLD rating on UBP shares on the basis of a PHP120/sh target price, equivalent to 1.9x 2013F PBV relative to an estimated 19.2% ROE.

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