CIMB Securities 2015-08-26: United Overseas Bank - Least preferred.


Least preferred 

  • As the focus on the Singapore banks shifts towards NPLs and provisioning costs, we believe UOB’s share price will continue to underperform its peers given its largest exposure to the problem areas of a slowing ASEAN and Singapore private property. 
  • We maintain our Reduce call on UOB. Our GGM-based target price falls to S$18.23 (which implies 1.03x CY15 P/BV) after we cut FY15-17 EPS by 2-26% to factor in recession assumptions. 

NPLs already surfaced in 1H15, mostly in ASEAN 

  • While UOB’s NPL ratio remained flat at 1.2% in 1H15, signs of asset quality deterioration have already started to surface. UOB saw NPLs from: 
    1. two big shipping accounts in Singapore, 
    2. private banking clients, 
    3. Singapore mortgages, 
    4. Malaysia, 
    5. Thailand, and 
    6. Indonesia commodity and SME loan books. 
  • In 2Q15, special provisions (SPs) jumped to 32bp of loans (1Q: 12bp), but total provisions were held stable at 31bp only with the help of write-backs in general provisions (GPs). UOB expects its Indonesian portfolio to remain challenging as it looks to clean up its book. Given the worsening credit environment, we raise our credit cost assumptions for FY15/16/17 to 36bp/75bp/50bp respectively. 

Most vulnerable to slowdown in capital-market fees 

  • Compared to DBS and OCBC, UOB has a smaller exposure to trade loans, hence it earns smaller trade-related fees and treasury customer income. Instead, its fees are mostly derived from capital market-related activities (wealth management and corporate finance), which are susceptible in a market downturn as these activities subside. 
  • We cut UOB’s non-NII growth in FY15/16/17 to -0.1%/ -0.1%/+2.9% (from +0.1%/+5.8%/ +5.9% previously) to factor in expectations of slower capital marketrelated activities. 


  • We maintain our Reduce call on UOB, with a lower target price of S$18.23 (based on GGM, 1.03x CY15 P/BV). After the steep market sell down, the stock trades at 1.10x CY16 P/BV and 9.8x CY16 P/E after we build in recession assumptions. 
  • UOB remains our least favourite on several fronts: 
    1. its lowest CASA ratio makes it the smallest beneficiary in a rising rate environment, 
    2. it has the highest risk of NPLs from a slowing ASEAN and high-end property in Singapore, 
    3. its fee engine is the least impressive, and 
    4. its ROEs are the lowest. 
  • While asset quality has remained healthy for DBS and OCBC in 1H15, UOB has already started to recognise NPLs in Malaysia, Indonesia, Thailand and in its Singapore mortgage book. As the investors’ focus on the Singapore banks shifts from NIM expansion to downside from loan loss provisions, we believe UOB’s exposure to the problem areas will be reflected negatively in its share price.

Kenneth NG CFA | Jessalynn CHEN | http://research.itradecimb.com/ CIMB Securities 2015-08-26
REDUCE Maintain REDUCE 18.23 Down 22.10