UOB - RHB Research 2015-10-15: PIOP Growth And Lower Taxes To Lift 3Q Earnings

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UNITED OVERSEAS BANK LTD UOB bank U11.SI 

UOB - PIOP Growth And Lower Taxes To Lift 3Q Earnings 

• We expect 2Q15 net profit to rise 10% QoQ, helped by a 5% QoQ improvement in pre-impairment operating profit (PIOP) and lower tax provisions. 
• Maintain NEUTRAL as we lower our FY15F-16F earnings by 2-3.5% and cut the TP to SGD21.70 (from SGD24.30, upside 9.5%). 
• We believe UOB’s share price is likely to continue to underperform peers given its high exposure to the property sector and ASEAN. 

 3Q15 net profit to improve QoQ. 

• United Overseas Bank (UOB) is scheduled to release its 3Q15 results on 30 Oct. We expect the bank to report a net profit of c.SGD836m, up 10% QoQ but down 4% YoY. 

 Earnings drivers. 

• The sequential improvement in net profit is likely to come from: 
  1. a 2% QoQ rise in operating income, 
  2. a moderate 5% QoQ rise in impairment charges, 
  3. tight control of opex, and 
  4. the normalisation of the effective tax rate after an above-average tax charge of 18.5% in 2Q15. 

 Forecasts and TP downgraded. 

• We trim our net profit forecasts by 2.4% for FY15 and 3.5% for FY16 as we: 
  1. cut loan growth assumptions to 3.5% (from 5%) for FY15 and 5% (from 6%) for FY16, and 
  2. increase credit cost estimates to 32bps (from 27bps) and 27bps (from 23bps) for the two years respectively. 
• Our GGM-derived TP is cut to SGD21.70 (from SGD24.30), implying a FY16F P/BV of 1.09x (historical mean: 1.35x, -1SD: 1.09x) and P/E of 10.2x (historical mean: 11.7x). 

 Key risks that could cause the share price to rise above/fall below our TP are: 

1. sharper-than-expected net interest margin (NIM) slippage or improvement that would impact revenue growth, 
2. higher-than-expected credit cost, 
3. a material slowdown or a pickup in its ASEAN operations, and 
4. stronger-than-expected growth in fee income. 

 Maintain NEUTRAL. 

• UOB’s share price is down 19% YTD, the worst performing among the Singaporean banks under our coverage. This reflects investor concerns over its soft topline growth, as well as high exposure to Singapore’s property sector, small and medium enterprises (SMEs) and the ASEAN market. 
• However, at 0.92x FY16F P/BV, we believe that much of the concerns have already been priced in.

Singapore Research RHB Securities | http://www.rhbgroub.com/ 2015-10-15

RHB Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 21.70 Down 24.30