UOB - RHB Invest 2016-10-31: Oil & Gas Provisioning Remains a Risk

UNITED OVERSEAS BANK LTD U11.SI

UOB - Oil & Gas Provisioning Remains a Risk

Whilst UOB’s 3Q16 net profit was above expectations due to lower-than- expected provisions, asset quality continued to deteriorate.
We forecast NPL ratio to rise to 2.0% by end-2017, from current 1.6%, on weakness in Oil & Gas sector and the general economy. Consequently, we forecast 2017 provisions to be 21% higher YoY.
A widening 2017 NIM would help to counter the effects of higher provisions.

We forecast more increases in NPLs in subsequent quarters, and project a peak NPL ratio of 2.0% by end-2017.
With cumulative general allowances lower QoQ, and loan loss coverage down to 111%, we believe provisions in subsequent quarters could rise from 3Q16’s level, although UOB’s 1.4% GP ratio provides some cushioning effect.
Following the lower 3Q16 provisioning, we cut provisioning expectations and raise our 2016 net profit forecast by 6% to SGD3,062m.

We note 3Q16 NPL ratio of 1.6% was higher than 2Q16’s 1.4%, due to new oil & gas NPLs.
Nevertheless, 3Q16 provisions rose 15% QoQ – lower than we expected – as UOB made specific allowances of SGD288m (+138% QoQ), but wrote back SGD113m of general allowances, which helped cap overall provisions.

While we expect 2016 NIM to remain narrow at 1.71% (9M16: 1.72%), it should expand in 2017 along with the anticipated Fed Funds rate hike.

Maintain NEUTRAL, with an unchanged GGM-derived TP of SGD18.90 factoring in CoE of 10% and 9.6% ROE (3Q16 ROE: 10.4%).
The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represents the upside risks.

UOB’s 9M16 net profit of SGD2,357m beat our estimate, reaching a high 83% of our earlier 2016 net profit forecast, as provisions came in below our expectations.

The 3Q16 credit cost of 32bps is similar to 2Q16’s 32 bps, while NPL ratio of 1.6% was higher than 2Q16’s 1.4%. Specific provisioning (SP) was up 138% QoQ; 40% of the additional SP was due to the fall in collateral value, particularly of oil & gas NPLs – management indicated they have been conservative in making these.
Management guided for continued high SP in 4Q16, as collateral value is seen to remain weak. However, with GP at 1.4% of loan book, we do not rule out a 4Q16 write-back of GP, similar to that in 3Q16.
Management is also guiding for 32bps SP for 2017.
3Q16 NIM widened a marginal 1bp QoQ to 1.69%, but was 8bps narrower YoY. Nevertheless, loan growth of 2% QoQ drove net interest higher by 2% QoQ.
Following the lower 3Q16 provisioning, we cut 2016 provisioning expectations (from SGD750m to SGD688m) and raise 2016 net profit forecast by 6% to SGD3,062m.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-31

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