UOB - DBS Research 2015-10-30: Lifted by trading gains

UOB - DBS Research 2015-10-30: Lifted by trading gains UNITED OVERSEAS BANK LTD UOB U11.SI 

UOB - Lifted by trading gains

  • 3Q/9M15 earnings were in line; NIM and loan growth was flat q-o-q; trading/investment income improved q-o-q while provisions remained high.
  • Special dividend of 20 Scts per share was declared to commemorate UOB’s 80th anniversary.
  • Staying conservative; regional operations holding up.
  • Maintain HOLD; S$19.20 TP.



Highlights


3Q15 earnings lifted by trading/investment income.

  • The main item that lifted earnings for the quarter was trading and investment income. Other than that, all P/L items were in line.
  • NIM was flat while loans hardly grew for the quarter.
  • As deposit growth outpaced loans, loan-to-deposit ratio eased a little.
  • Expenses were higher as expected due to its branding campaign as part of the UOB80 and SG50 celebrations.
  • Provisions were slightly higher, which was also expected. While specific provisions were lower q-o-q (due to higher levels set aside in 2Q15 for some legacy NPLs), general provisions were higher, keeping credit costs largely flat at 8bps (annualised 32bps).
  • NPL ratio rose to 1.3% arising largely from the general commerce segment, which comprises mainly of Singapore-based trading-related companies. Note that UOB’s exposure to commodities is less than 8% of total loans while the subsegment, oil & gas is c.5% of total loans.
  • Separately, capital ratios dipped a little as a result of higher risk weighted assets.

One-off dividend surprise. 

  • A one-off 20 Scts dividend per share was declared to commemorate the bank’s 80th anniversary.



Outlook 


Staying conservative. 

  • Loan growth is guided at 5% for FY15 excluding currency effects, but with the depreciation in the Malaysian Ringgit and Rupiah translated back to Singapore, loan growth by the year end would be lower than 5%. Management noted that the mortgage market is likely to slow down given fewer property launches. 
  • UOB will continue to focus on building up it US$ funding base in the near term as S$ deposit cost remains competitive. But as UOB has already built up a solid US$ funding base, over time, the bank will be more selective to retain quality US$ deposits. 
  • Credit cost should remain within the 30-35bps band. Costs will likely stay high as investments in technology is required particularly for digital banking and cyber security. 
  • Other investments to further enhance regional operations are still ongoing but the increase should not be high. 
  • Dividend policy is unlikely to change but if there is excess capital, special dividends may be declared. 
  • Management remains cautious on the possible changes in the calculation of risk-weighted assets which may dent capital a little. 

Regional operations holding up. 

  • Of its regional operations, general NPL trends have held up better than expected. 
  • Its Indonesian operations saw the peak of provisions and NPLs in 2Q15. While there were some more provisions set aside in 3Q15, NPLs have stabilised. 
  • Malaysian operations held up well and management remains comfortable with its asset quality position. 
  • UOB’s Greater China exposure remains small but volume growth in Hong Kong is expected to moderate given that it had grown aggressively in the past, while margin pressure is possible given the liberalisation in deposit pricing there. 


Valuation: 

  • Our S$19.20 TP is based on the Gordon Growth Model, implying 1.0x FY16F BV. While UOB’s regional footprint in ASEAN is more complete vs peers, near-term headwinds, particularly in managing its funding cost, could hamper growth. 


Key Risks: 


High proportion of loans in mortgages. 

  • With mortgage approvals sliding after several property cooling measures, we believe UOB may face more downside risks on mortgage growth once previous approvals for drawdowns taper off. 

Regional funding costs, a near-term challenge. 


  • UOB has been facing funding cost pressures in its regional operations, particularly in Indonesia and Malaysia. Near-term pressure on funding costs could curb NIM upside.



LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2015-10-30
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 19.20 Same 19.20


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