UOB - To Gain From NIM Widening
- We raise UOB’s Target Price by 21% to SGD22.90 (from SGD18.90, 9% upside) as we cut 2017 loan loss provisioning and raise our long-term ROE assumption to 10.1%.
- We believe 4Q16’s asset quality deterioration was at a controlled pace, which should keep credit costs within management’s guidance.
- UOB has the highest LLC amongst peers, which provides scope for a write-back of general provisions in 2017. The bank ought to record wider NIMs from the SIBOR’s rise. Its share price has also underperformed DBS by 10ppts over the past four months.
- We upgrade to BUY (from Neutral).
NIMs seen to widen in 2017.
- We are optimistic that Singapore’s banks would record wider NIMs as the Singapore Interbank Offered Rate (SIBOR) rises in tandem with the US federal funds rate. The 3-month SIBOR has risen to 0.96% (end-Sep 2016: 0.87%).
- A rising SIBOR ought to raise lending yields, particularly for floating rate loans – such loans account for > 80% of United Overseas Bank’s (UOB) loan book.
- The increase in cost of funds is more muted, as SGD fixed deposits account for only half of total SGD deposits. However, the widening NIM would only be partially felt in 2017, as the rise in the US federal funds rate is throughout the year. Hence, we have assumed UOB’s 2017 NIM at 1.78%, which is slightly wider than our 2016 estimate of 1.71%. This is to widen further to 1.81% in 2018, in our view.
Loan growth slow but respectable.
- We are forecasting UOB’s 2016 loan growth at 4.9%. With the slow economic environment, we estimate a weak 2017 loan growth of 3.5%. Hence, the expansion in 2017 NII is expected to come mainly from widening NIMs.
We raise our 2017 net profit forecast.
- We have factored in a rising NPL ratio over the next few quarters, with an end-2017 forecast of 2% (3Q16: 1.6%). UOB had a 3Q16 LLC of 111%, which was wider than DBS Group’s (DBS) (DBS SP, BUY, TP: SGD18.40) 100% and Oversea-Chinese Banking Corp’s (OCBC) (OCBC SP, NEUTRAL, TP: SGD8.81) 101%.
- This provides scope for UOB to write-back some of its general provisioning to offset possible requirements for specific provisioning in the quarters ahead. Consequently, we cut our 2017 provisions assumptions by 5% to SGD788m (2016F: SGD688m). Thus, our 2017F net profit is raised marginally by 1% to SGD2.96bn.
UOB may catch up after the recent share price under-performance.
- Since end-Sep 2016, DBS’ share price has risen 22% while OCBC climbed 8%. UOB was up 12%. We see potential for the bank to catch up in share price upside given the current mild NPL ratio and its potential gains from a SIBOR rise.
- We raise our GGM-derived TP to SGD22.90 (from SGD18.90), which factors in cost of equity (CoE) of 9.2% and ROE of 10.1%. It stood at 9.6% (CoE) and 10.4% (3Q16 ROE) previously.
- Total potential return exceeds 10% when we include the 3.3% dividend yield.
- The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represents the upside risks.