UOB - RHB Invest 2015-11-02: Asset Quality Benign, Special Dividend Declared

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UNITED OVERSEAS BANK LTD UOB bank U11.SI 

UOB - Asset Quality Benign, Special Dividend Declared 

• 3Q15 earnings rose 13% QoQ mainly from a one-off SGD100m gain from the sale of securities. 
• Maintain NEUTRAL and SGD21.70 TP (7% upside). 
• Concerns over UOB’s relatively higher exposure to ASEAN would linger until macroeconomic conditions improve while being challenged to sustain NIM in 2016. 
• Still, a special dividend of 20 cents/share, declared to celebrate the bank’s 80th anniversary, would provide some support to share price in the near term. 

 Results in line. 

• United Overseas Bank’s (UOB) 3Q15 net profit of SGD858m was in line with consensus forecast, while 9M15 earnings of SGD2,421m was 76.5% of the street’s 2015 forecast of SGD3,162m. 
• The 13% QoQ rise in 3Q15 earnings was led mainly by net gains from sale of investment securities (c.SGD100m). 

 Key positives for 3Q15 were: 

1. stable net interest margin (NIM) of 1.77% helped mainly by lower funding costs, 
2. steady 4% QoQ increase in fee income led by higher loan-related fees, and 
3. moderate 2% QoQ rise in non-performing loans (NPLs) and relatively stable credit cost of 32bps (2Q15: 30bps). 

• The main negative was the muted loan growth of 0.4% QoQ (mainly due to depreciation of MYR and IDR), 

 Asset quality healthy. 

• Gross NPLs rose 2% QoQ in 3Q15, resulting in moderate YTD increase of 8.2%. Gross NPL ratio was still low at 1.26% (Dec 2014: 1.18%) with the NPL ratio of its Singapore book at a low 0.9%, Greater China 0.7% and Indonesia 3.4%. 
• UOB’s exposure to the broad commodity sector stands at less than 8% of total loans, of which the oil and gas (O&G) sector made up 5%. Loan loss coverage (LLC) dipped slightly to 142.7% (June: 144.1%). 

 Management’s guidance. 

• Excluding currency effects, loan growth target of 5% for 2015 stays within reach. NIM ought to be stable in 4Q15 but faces downside risks in 2016. Management remains comfortable with quality of its loan portfolio. While NPLs would grind higher in 2016, credit cost is expected to be relatively benign. 

 Maintain NEUTRAL. 

• No change in our NEUTRAL rating and GGM-based SGD21.70 TP, which implies 1.09x FY16F P/BV. 
• We believe UOB’s share price would continue to underperform peers on lingering concerns over its higher exposure to ASEAN. 
• We see downside risks to 2016 NIM with pressures coming from its regional operations.

Singapore Research RHB Research | http://www.rhbinvest.com.sg/ 2015-11-02

RHB Research SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 21.70 Down 24.30