UOB - On Track For An Earnings Improvement
- UOB’s results are in line with our estimates, and reflect the stabilisation in its asset quality. However, we project a higher NPL ratio of 1.7% by end- 2017, on the back of a challenging economic environment.
- Its 1.1% GP-to- loans ratio – higher than the peer average – provides scope for further write-backs.
- The anticipated US Fed rate hikes would also bring NIM closer to our 2017 forecast of 1.76%.
- Maintain BUY, with an unchanged TP of SGD23.90 (11% upside) pegged to a FY17F P/BV of 1.2x, which assumes a long-term ROE of 10.4%.
We expect its end-2017 NPL ratio to be at 1.7% (1Q17: 1.5%), after remaining unchanged QoQ.
- Whilst we view United Overseas Bank’s (UOB) sequentially unchanged NPL ratio as a positive, we believe the systemic economic challenges could lead to higher NPL ratios in the quarters ahead.
We maintain our provisioning expectations.
- UOB’s 1Q17 overall credit cost of 32bps was unchanged from 4Q16’s level. Total allowances rose 43% QoQ to SGD186m, ie 26% of our FY17 provisions estimate. Its specific credit cost of 49bps was also down from 4Q16’s 76bps, which is a major positive. Its NPL ratio stayed the same, at 1.5%.
- UOB was able to release general provisions due to its balance sheet strength. The provisions were no longer required on other assets relating to debt securities in 4Q16.
- As at end-March, the bank’s general provisions-to-loans ratio stood at 1.1%, which still provides scope for writebacks in the future.
NIM widening in 2017.
- We expect 2017 NIM to widen to 1.76% (2016: 1.71%), along with the anticipated US Federal Reserve (US Fed) rate hike.
- 1Q17 NIM rose 4bps QoQ to 1.73% due to rising short-term interest rates, but narrowed 5bps YoY.
UOB guided for mid-single digit 2017 loan growth (our forecast: 4.5%).
- Together with wider NIMs, we expect NII to grow. Loans grew 1.5% QoQ in 1Q17, mainly driven by loans to the manufacturing sector climbing 8% QoQ (7% of total loans) – these are mainly trade-related lines given to the manufacturing sector.
- Management said loans could have expanded faster if UOB had granted more loans at lower interest rates – the bank had rejected loans in 1Q due to low interest rates.
Results in line.
- 1Q17 net profit rose 5% YoY and 9% QoQ to SGD807m. It comprised 25% of our and consensus 2017 net profit forecasts of SGD3.26bn and SGD3.2bn respectively.
- We introduce our FY19F earnings in this report and factor in a single-digit FY19 net profit expansion on the back of stronger revenue.
- We maintain our GGM-derived TP of SGD23.90, which assumes a 9.1% cost of equity (CoE) and 10.4% ROE (2016 ROE: 10.2%). Our TP also implies 1.2x 2017F P/BV.
- The downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs.