UOB - Lower Overall Provisions Due To GP Write-back
- We project a higher NPL ratio of 1.7% by end-2017 (vs 4Q16 of 1.5%), due to the oil & gas space and slowing economy.
- UOB’s 1.2% GP-to-loan ratio is the highest amongst peers, and provides scope for a further write-back. The anticipated Fed rate hikes would also bring NIM closer to our 2017 forecast of 1.76% (from 2016’s 1.71%).
- We raised our 2017 net profit forecast by 10% on lower provisions and higher non-interest income.
- Maintain BUY with a higher TP of SGD23.90 (from SGD22.90, 15% upside), as we raise our ROE assumption to 10.4% (from 10.1%).
We forecast future increases in NPL ratio
- We forecast future increases in NPL ratio despite the marginal dip to 1.5% (from 3Q16’s 1.6%). The 4Q16 NPL reduction was partly due to higher write- offs, but we believe the soft economic environment could raise NPLs ahead.
We cut 2017 provisioning expectations by 10%.
- 4Q16 provisions were down 29% QoQ, as higher specific provisions were offset by a general provisions write-back.
- UOB’s GP ratio of 1.2% remains higher than peers and provides scope for UOB to further write-back in the quarters ahead.
NIM widening in 2017.
- We expect 2017 NIM to widen to 1.76% (from 2016’s 1.71%), along with the anticipated US Federal Reserve rate hike. Management guided for a mid-single digit 2017 loan growth, and we forecast 4.5%.
- All these are likely to contribute to a stronger net interest income.
- After fine-tuning our assumptions, we tweak our GGM-derived TP to SGD23.90 on:
- Factoring in 9.1% CoE and 10.4% ROE (2016 ROE was 10.2%);
- The downside risks to our forecast include higher-than-expected impairment charges and weaker-than-expected NIMs.
- The converse represents the upside risks.