United Overseas Bank (UOB SP) - Relatively shielded
Loans growth beat; Raised EPS 8% and TP 6%
- UOB’s FY16 results were in line with our expectation.
- Loans grew 8.9% YoY, surprising on the upside and ahead of peers of +4-6%.
- We raised our FY17-18E net profit by c.8% each mainly to reflect:
- higher loan growth assumption of 4% (from 2-3%); and
- 8-9% less provisions as we think it is relatively more well-shielded from O&G loan impairments due to its lower sector exposure.
- Having said that, our FY17-18 credit-cost assumption remains conservative at between 36bps and 39bps.
- Our TP is raised by 6% to SGD19.54, based on ~1.0x FY17E P/BV (from ~0.9x previously).
- We maintain HOLD and await signs of a bottom in asset quality deterioration and/or rising rates.
Higher loan growth, but loan yields compressed
- Despite higher loan growth, FY16 net interest income (NII) increased slightly by 1.3% YoY and 4Q16 NII remained flat YoY due to lower SGD interest rates. 4Q customer spreads narrowed to 2.09%, -4bps QoQ from 2.13%.
- There are no indications of a widening credit risk premium as it shifts focus to lending to large corporates/better quality credit.
Provision buffer to ride through cycle
- Non-performing assets coverage at 116% is higher than peers’ 97-100%.
- Out of SGD969m of specific provisions (SP) in FY16, SGD388m was taken to account for the decline in collateral values in the O&G sector (i.e. 40% of SPs).
- While there will be more SPs, management expects the impact to be less significant in 2017.
- Increase in SPs for FY16 was offset by a write-back in general provisions (GP) to maintain total credit costs at 32bps. This resulted in a lower GP buffer at 1.2% (3Q16: 1.4%) but still higher than peers’ 0.9-1.1%.
- Management expects FY17 credit cost to be maintained at 32bps. For every 10bps decline in credit costs, we estimate FY17 net profit to increase by 7%, ceteris paribus.
TP raised c.6% to SGD19.54
- With the change in EPS forecasts, our assumed sustainable ROE is now 10% (9.6% previously); cost of equity of 10.1% and 3.5% growth rate. As such, our TP is raised by 6% to SGD19.54, based on ~1.0x FY17E P/BV, 1SD below its historical mean to reflect lower forecast ROEs.
- Risks to our call include:
- NIM improvement from higher interest rates;
- higher non-interest income; and
- lower provisions.
- Sharp and sustained rebound in commodity prices ease concerns about global risks.
- Ability to re-price assets at higher interest rates, widening credit spreads.
- Proactive restructuring of loans allows asset quality to hold up better than expected, with no major credit slippages.
- Higher demand for domestic mortgages from easing of property-cooling measures.
- Asset quality deterioration becomes a systemic problem, especially if job losses in Singapore become pervasive and hurt the mortgage portfolio.
- Shocks in the fixed income portfolio.
- Lack of liquidity of a funding currency.
- Succession issues.
- Major changes in the banking competitive landscape in Singapore that result in the emergence of a dominant financial institution.
- Translational losses from MYR/IDR depreciation.
- Capital raising by any institution in sector.