United Overseas Bank - CIMB Securities 2015-09-02: Growth engine limited by size.


Growth engine limited by size 

  • Greater China has been one of UOB’s fastest-growing regions, thanks to rising trade flows between Greater China and ASEAN. During its Greater China Corporate Day, UOB voiced its belief that its competitive edge lies in: 
    1. its ability to leverage non-banking relationships to drive banking business, and 
    2. having one of the strongest ASEAN networks. 
  • However, UOB’s Greater China business remains the smallest among the Singapore banks and we see limited ability to expand quickly in a crowded market. 
  • Our biggest concern for UOB remains its ASEAN exposure where NPL formation has accelerated. 
  • We maintain our Reduce call and GGM target price of S$18.23 (1.03x CY15 P/BV). 

What Happened 

  • We attended UOB’s Greater China Corporate Day in Shanghai. Management said that its key strategy in China is to capture intra-regional flows, riding on tailwinds from Rmb internationalisation, rise in Chinese corporates’ investment in ASEAN through the “One Belt, One Road” initiative and demand for property investments abroad. These trade flows have created demand for cash management and hedging services, which are becoming increasingly important fee income drivers as plain vanilla lending turns less profitable. 
  • UOB’s latest push was into the financial institutions space, which brought in an important and sticky source of US$ funding and positioned UOB to capture more flow business. Opportunities ahead could come from: 
    1. wealth management with the removal of the US$50k cap on outbound investments, and 
    2. set-up of operations in Kunming to capture trade flows with Myanmar. 

What We Think 

  • Compared to DBS and OCBC, UOB’s Greater China business is small, with Greater China loans at S$40bn (DBS: S$102bn, OCBC: S$58bn). Compared to the group, UOB China’s revenue is skewed towards institutions, with a breakdown of 45%/35%/20% between corporates/SMEs/consumer. 
  • We think UOB’s key risk is in pacing expansion with costs and credit quality – it is tough to cherry-pick customers in an increasingly crowded market while cost will limit its ability to scale up quickly. 
  • On the asset quality front, we are not so concerned about UOB’s Greater China portfolio. c.40% of its loan exposure is to short-term trade finance while c.15% is backed by cash and c.30% secured by mortgages. Its non-trade exposure is mostly to SOEs and blue chips. 
  • Instead, we remain concerned about its exposure to ASEAN where NPL formation has accelerated. 

What You Should Do 

  • Maintain Reduce. The key de-rating catalyst is rising NPLs in ASEAN.

Kenneth NG CFA | Jessalynn CHEN | http://research.itradecimb.com/ CIMB 2015-09-02
REDUCE Maintain REDUCE 18.23 Same 18.23