United Overseas Bank Limited - Walking the Fine Line Between Risk and Reward
- Maintaining net interest income growth with riskier loans and high Loan to Deposit Ratio (LDR).
- Customers Loans would be affected by strengthening USD and weaker construction sector in Singapore.
- Downgrade to "Reduce” with a higher target price of S$18.97 (previously S$17.63) pegged at unchanged 0.95x FY17F book value (excluding preference shares).
Maintaining net interest income with riskier loans and moderately high LDR.
- We expect UOB to manage an optimal balance of riskier loans to generate higher returns while maintaining LDR c.85% to keep net interest income growth positive.
- We refer to our Singapore Banking Sector report titled “Challenges to loans and net interest income growth” which expounds our thesis.
Near term headwinds to UOB’s customer loans
- UOB’s USD Customers Loans which makes up 19% of the total Customers Loans is vulnerable to the strengthening of the USD.
- We also expect the weak performance from the Singapore construction industry to affect UOB’s Singapore Construction Loans which we estimate to be 13% of total Customers Loans as of 3Q16.
- The press release dated 3 Jan 2017 from Ministry of Trade and Industry indicates a deeper contraction of -2.8% y-o-y in 4Q16 for the Singapore construction industry. At the same time, the Singapore Payment Performance released by Singapore Commercial Credit Bureau shows that the construction sector registered the highest proportion of slow payments.
Operating trends expected in 4Q16
- We expect 4Q16 PATMI to be S$786mn (-0.63% q-o-q, -0.25% y-o-y) owing to higher provisions in the quarter in line with our expectations of UOB taking on riskier loans. But we expect a slight q-o-q growth in net interest income growth because SOR and SIBOR only started an upward trend from mid-November 2016, halfway into the 4th quarter.
- UOB’s loans are mostly based in Singapore (55% by geography and 51% by currency). The downside would be an acceleration of non-performing loans triggered by a weak domestic economy amid high levels of private sector debt while the net interest income on its loans does not commensurate with the higher provisions required.
- Downgrade "Reduce” with a higher target price of S$18.97 (previously S$17.63) as we roll over to FY17F valuation.
- Our new target price is based on unchanged 0.95x FY17F book value (excluding preference shares).