United Overseas Bank Limited - Phillip Securities 2016-10-31: Posturing for more returns from higher risks

United Overseas Bank Limited - Phillip Securities 2016-10-31: Posturing for more returns from higher risks UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank Limited - Posturing for more returns from higher risks

  • 3Q16 NPAT of S$791mn was down 7.8% y-o-y attributed by a 4.7% y-o-y decrease in non-interest income and higher allowances.
  • 3Q16 NIM decreased 8bps y-o-y to 1.69% (3Q15 NIM: 1.77%) but increased 1bps q-o-q (2Q16 NIM: 1.68%).
  • 3Q16 NPL was higher y-o-y at 1.61% (3Q15: 1.26%) and higher q-o-q (2Q16: 1.44%).
  • Maintain to "NEUTRAL” with a lower target price of S$17.63 (previously S$17.95) pegged at unchanged 0.95x FY16F PBR (excluding preference shares).


How Do We View This?


Loans growth continue to be strong. 

  • Leading the loans growth in 3Q16 are Building and Construction loans, up 15.8% year-on-year (“y-o-y”) and Housing Loans, up 9.2% y-o-y. However, we do not expect the strong growth momentum to continue, because 
    1. Housing Loans growth should taper off with increasing competition; while 
    2. SMEs' (accounting for 20% of loans book) demand for loan to remain weak as economy slows down. 

NIMs remain stable quarter-on-quarter (“q-o-q”). 

  • Net interest income steadied as a customer loans grew 2.4% q-o-q offsetting the lower interest rates on customer loans amid declining SOR and SIBOR. 
  • Better yield on interbank balances helped improve overall interest earning efficiency. 
  • Also a strong funding base allowed UOB to lower customer deposit expense by 3bps.

NPLs rose 17bps q-o-q to hit 1.61%. 

  • New NPL formation was mostly contributed by deterioration in collateral values of vessels in the Oil and Gas industry. Collateral values are referenced to market price which are pressured downwards by private equity funds lowballing offshore vessel deals. This has led to a sharp rise in 3Q16 specific allowance (“SP”) of S$217mn compared to 2Q16 SP of S$96mn and 3Q15 SP of S$15mn for Singapore incorporated companies. 
  • 3Q16 Upstream oil and gas loans exposure is S$4.0bn (1.87% of total customer loans). NPL coverage ratio declined to 112.4% in 3Q16 from 125.6% in 2Q16.
  • We had noticed that while Non-performing assets (“NPAs”) secured mainly by shipping vessels had increased 12.8% q-o-q to S$804mn corollary to the general weakness in the offshore industry; an even larger jump in NPAs was registered for unsecured loans, up 27.9% q-o-q to S$1.606bn. 
  • We suspect that UOB is moving ahead of the economic cycle and may likely accept higher risks from growing loans even as overall economy remains weak. 
  • In order to buffer for increased risk taking, we expect UOB to recognise higher allowance; not only for oil and gas loans but also for other industry segments that they intend to increase lending.

Non-interest Income declined 4.7% y-o-y. 

  • The overall decline was mainly due to an 84% yo-y decline in Net gain from investment securities owing to one-off gains from sale of investment securities in 3Q15. 
  • Net trading income rose 39.4% y-o-y because of increased flows from customer trading activities such as FX related activities.


Investment Actions 

  • UOB’s 3Q16 NPAT of S$791mn was in line with our expectations of S$792mn. 
  • Maintain "NEUTRAL” with a lower target price of S$17.63 (previously S$17.95). Our new target price is based on unchanged 0.95x FY16F book value (excluding preference shares). 
  • The lower share price reflects dilution from scrip dividends.




Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2016-10-31
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 17.63 Down 17.950




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