United Overseas Bank (UOB SP) - Maybank Kim Eng 2017-04-28: Resilient Performance

United Overseas Bank (UOB SP) - Maybank Kim Eng 2017-04-28: Resilient Performance UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - Resilient Performance



    A good quarter; Raise EPS/TP 

    • 1Q17 core PATMI of SGD807m (+9.3% QoQ, +5.4% YoY) was in line with our expectations at 24% of our FY17E. Positive signs emerged: 
      1. NIM expanded 4bps QoQ and customer spreads improved to 2.14% (4Q16: 2.09%); 
      2. healthy loan growth at 9.5% YoY; 
      3. higher non-interest income from higher fees and trading income; and 
      4. asset quality ex-O&G sector was stable. 
    • For FY17, mgmt guide 5% loan growth / increases in IT expenses as it builds product capabilities for the franchise / expects some NIM upside / comfortable with credit cost at 32bps and sees slower momentum in new NPA formation.
    • We raised FY17-19 net profit by c.4-5% mainly from: 
      1. raised net interest income by c.1-5% as we factored in higher loan growth assumption of 6% (from 4%); and 
      2. lowered provisions by 1-16% as our previous estimates were more conservative. 
    • Our FY17-19 credit cost assumption is now 32-33bps (from 36-39bps). Our TP is raised by 6% to SGD20.80 based on ~1.0x FY17E P/BV. Maintain HOLD.


    Key is sustainability 

    • Customer spreads improved as lending yields rose from higher SGD interest rates. We think it is also partly attributable to UOB’s ‘selective lending’ strategy to ensure no significant margin compression from customers of good quality. 
    • Loan growth was healthy in Singapore (+6% YoY), Thailand (+20%), Greater China (+22%) and Others (+22%). The increase in Thailand’s loan growth was mainly from housing loans, Greater China from FI and general commerce loans, and Others (Australia, US) from FI loans. FI lending saw robust growth, at 27% YoY.
    • However, non-interest income was partly supported by a strong trading quarter. Net trading income rose 59% YoY, as 1Q16 was a low base. While 70-80% of its trading income came from gains in treasury customer flows, it remains to be seen if the trend is sustainable in the next few quarters.


    Maintain HOLD 

    • With the change in EPS forecasts, our assumed sustainable ROE is now 10.4% (10% previously), COE of 10.1% and growth rate of 3.5%. With that, our TP is raised by 6% to SGD20.80, based on ~1.0x FY17E P/BV, 1SD below historical mean to reflect lower ROEs. 
    • Risks to our call include: 
      1. higher net interest income; 
      2. higher non-interest income; and 
      3. higher provisions.


    Swing Factors


    Upside

    • Sharp and sustained rebound in commodity prices ease concerns about global risks.
    • Ability to reprice 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.

    Downside

    • 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.




    Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-28
    Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 20.80 Up 19.540



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