UOB - DBS Research 2016-12-07: Benefitting from higher rates; but still lacks a non-interest income angle

UOB - DBS Vickers 2016-12-07: Benefitting from higher rates; but still lacks a non-interest income angle UNITED OVERSEAS BANK LTD U11.SI

UOB - Benefitting from higher rates; but still lacks a non-interest income angle

  • Maintain HOLD; TP raised to S$21.80; earnings raised by 10% on higher NIM.
  • Loan growth to taper off to low single digits in FY17.
  • Asset quality issues to ease off; credit cost still guided at 32bps.
  • Still lacks a non-interest income catalyst; more reliant on loan-related business.



Rising rates would see rising NIM, but partially priced in, HOLD.

  • Expectations on rising interest rates from December 2016 should start to spell a new phase for higher NIM. 
  • Our FY17-18F earnings are raised by 10% per year on higher NIM expectation bearing in mind loan growth will likely stay sluggish and funding costs stay stable. 
  • We expect credit costs to decline in FY17F as the bulk of NPL issues have been addressed. UOB remains the most well buffered in terms of general provision reserves buffer.


Top-line driven. 

  • We expect NIM to rise by 9bps in FY17F and stabilise going into FY18F. This will be the key driver to top line amid another expected sluggish year for loan growth. 
  • Our sensitivity analysis indicates that for every additional 25-bp increase in SIBOR, UOB’s NIM will rise by 6bps, holding other variables constant, and this would lead to a further 5% uplift to earnings. Note that UOB’s S$ CASA-to-total deposits are at 44% (OCBC: 50%). 
  • UOB still lacks a strong non-interest income catalyst in our view. It has also been lying low when it comes to acquisitions of wealth management businesses compared to peers. 
  • UOB’s non-interest income is more skewed towards credit-related business, which in our view would see growth a tad lower vs peers which have higher growth from their wealth management businesses.


Managing asset quality and growth expectations. 

  • There is more than sufficient excess general allowances as a buffer to manage its credit costs with general allowance reserve-to-total loans at 1.4%, highest among peers, even after utilising part of it to offset specific provisions in 3Q16. SME loans would be closely watched; SME loans are approximately 20% of total loans.
  • Specific provision levels should normalise in 2017 but overall credit cost should stay at 32bps.


Valuation

  • TP is raised to S$21.80 after our earnings upgrade of 10% over FY17-18F on higher NIM assumptions. This implies 1.1x FY17F BV and is derived from the Gordon Growth Model (10.3% ROE, 3% growth, 9.7% cost of equity). 
  • A new catalyst has emerged – rising rates bode well for NIM.  


Key Risks to Our View

  • Further risk to asset quality. NPL formation may still stay high for another quarter before normalising. A prolonged deterioration in the oil & gas sector, coupled with additional stress from SME, could pose downside risk to earnings.




LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-12-07
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 21.80 Up 18.100




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