Market retraces as political risk rises, UOB earnings in line

CMC Markets

Asian markets are set to retrace from recent highs as US political uncertainties and trade risks weigh on sentiment.

US House of Representatives voted last night to start a public phase in President Trump’s impeachment inquiry, which will pave the way to open hearings.

Bloomberg has reported that Beijing has little incentive to commit to a long-term trade deal. Although this is nothing new, it still dampened investor appetite to chase up record highs in the equity market.

Safe havens, namely gold, silver and Japanese yen had a decent rally overnight and are likely to extend gains today due to fears about the uncertain US political environment and diminished trade deal prospects.

In Hong Kong, the Hang Seng Index has consolidated at around 26,500-27,000 points this week with the release of Q3 GDP confirming a technical recession in the financial hub as prolonged protests brought severe economic damage. Hong Kong GDP plunged 3.2% in the third quarter, reflecting a combined effect of global cyclical downturn and significant decline in inbound tourism, entertainment and in the financial services segment.

Singapore’s lender UOB released its Q3 earnings that slightly beat market expectations this morning. Q319 net income is up 8% year-on-year to S$1.12 billion, but decreased 4% from Q219. Q3 net interest income increased 5% as a strong 8% loan growth was partially offset by lower Net Interest Margin (NIM) due to lower interest rates and a competitive environment.

Q3 net interest income rose 5% and net fee income rose 14%, boosted by strong wealth management performance. Trading and investment income grew 67% from improved customer flows and gains from investment securities.

Q3 NIM dropped 4 basis points to 1.77% from Q2, due to declining interest rate and a competitive pricing environment. I believe that the bank’s NIM is likely to be compressed in the quarters to come, as the Fed’s rate cut effect will slowly kick in.

The double-digit growth in the bank’s profit is probably coming to an end, due to weakness in the broader economy as well as lower interest rates in the second half of this year. Still, local banks’ profits are likely to expand at a lower, high single digit growth rate, underpinned by wider margins, 5-6% loan growth and higher fees income.

Wealth management fees might be a highlight as there seemed to be strong demand for wealth management services last quarter.

The three local banks are trading at reasonable valuations of 10.5 times P/E, and 4.5% dividend yield.

UOB Q3 earnings