CIMB Research 2015-07-31: United Overseas Bank - ROEs grovel below 11%. Downgrade to REDUCE.

ROEs grovel below 11% 

  • UOB’s 2Q15 core net profit of S$762m was disappointing, coming in at 10%/7% below our/street estimate, while 1H15 earnings only made up 46%/47% of our/consensus full-year forecasts. 
  • The miss was mainly due to lack of trading income, slowing core income (NII, fee income), rising costs and a jump in SPs. 
  • We cut our FY15-17 EPS forecasts by 5-6% to reflect all these issues. 
  • Our GGM-based target price (1.25x CY16 P/BV) falls (from S$23.95 to S$22.10) and we downgrade our rating from Hold to Reduce. 
  • UOB guides that the higher SPs in 2Q were pre-emptive, and SPs should fall in 3Q. 
  • We think the catalyst for more downside would be credit costs staying high as ASEAN slows. 

No loan growth, margins +1bp, fee income slows 

  • Headline loans declined 0.5% qoq due to currency effects; +1% qoq ex-currency. 
  • SG loan growth (+0.5%) also slowed. 
  • There was little NIM expansion (+1bp) as most of UOB’s SIBOR loans are corporate loans that re-price fairly quickly, hence the effect was already in 1Q. 
  • Funding pressures remain. UOB can still get relatively cheap wholesale funding but competition for consumer deposit is high. 
  • Higher funding cost would eat up any ability to price up yields, so NIMs are likely to be flat from here. 
  • Otherwise, fee income (+2.6% qoq) was decent, though income streams like WM and corporate finance did not fire up, like in DBS. 
  • The bigger culprit to the topline miss was weak trading-related income. 

Negatives - rising costs and a jump in specific allowances 

  • Unfortunately, other negatives add up. 
  • Total costs rose 2.9% when topline dipped 1.5% qoq, contributing to negative jaws. UOB attributed the rising costs to the hiring of quality people and investment in digital banking infrastructure. 
  • The other worrying factor was provisioning. Whilst the NPL ratio was flat, UOB had a significant jump in SPs this quarter on the back of Singapore mortgage NPLs (now 38bp of loans vs. 27bp previously), Malaysia, and Indonesia’s commodity and SMEs NPLs. 
  • Total provisioning (32bp) held stable only because it trimmed GP this quarter. 
  • UOB guides that SPs were pre-emptive and should recede in 3Q, but we raise our FY15 LLP assumptions to 33bp of loans. 

Where’s my upside? 

  • We take the hike in interim DPS (35 Scts vs. 1H14: 20 Scts) as a sign that DPS will not be cut even if FY15 earnings come in flat. 
  • However, with this weak 2Q, 1H15 ROE was a poor 10.8% (1H14: 12.4%) and upside for UOB looks limited.

(Kenneth NG, CFA; Jessalynn CHEN)

Source: http://research.itradecimb.com/