United Overseas Bank UOB - Maybank Kim Eng 2015-10-14: Fundamentals intact

United Overseas Bank UOB - Maybank Kim Eng 2015-10-14: Fundamentals intact UNITED OVERSEAS BANK LTD UOB bank U11.SI 

United Overseas Bank UOB - Fundamentals intact 

  • Against uncertain macro outlook and firmer rates, UOB is best positioned to ride out the current headwinds. Our quantitative analysis shows that of the three banks, UOB’s balance sheet is most sensitive to repricing, yet possesses the ability and propensity to pass on higher credit spreads. 
  • The Goldilocks era in banking may have passed. Credit costs will likely increase. Razor thin NIMs may not fully reflect heightened credit risks. Of the three banks, UOB’s customer NIMs are holding out best possibly because it has the strongest SME franchise. Downgrade to HOLD at TP SGD21.00. 
  • Our forecasts put us at the low end of consensus and we are Underweight the sector. Following last 5 years of underperforming DBS, UOB looks more appealing in this part of the cycle. We see relative outperformance. 


  • From our sector report, our quantitative tests under a scenario of a 50 bps increase in SIBOR, credit spread and interest differential could yield a 15-16 bps rise in group NIMs. But we only assumed a 5 bps increase for 2016 since our central scenario is a mild hike in rates and uneasy (not disastrous) lending landscape. 
  • Our studies reveal an impressive assets and liabilities management structure and ability to command higher risk premium in an unfavourable lending environment. We are assured that the group has the highest proportion of SGD assets. But UOB will not escape higher credit costs along with the rest of the region. There were some prudential upfront provisioning but the pockets of vulnerabilities especially in North Asia and ASEAN require further provisioning. 
  • Our Stress Test “I So Wanna Be Resilient” suggests that China may experience negative free cash flow in 2016. We have thus increased provisions by 3.7-58.4% for FY15-17 to account for credit slippages. 

Valuations fair; D/G to HOLD 

  • In the light of our caution about the operating landscape, we think valuations are fair even though the stock is now trading at close to -1SD. 
  • Downgrade to HOLD with SGD21.00 TP, at 1.2x FY15 P/BV, close to 0.5SD below its mean since 2005.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-14
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 21.00 Same 21.00