United Overseas Bank - CIMB Research 2015-10-30: Plenty of positives but seemingly one-off

UNITED OVERSEAS BANK LTD UOB bank U11.SI

United Overseas Bank - Plenty of positives but seemingly one-off

3Q15 net profit (S$858m) was 8% above our estimate (S$792m) and 6% above consensus (S$812m) because of one-off gains from sales of investment securities.
Excluding the trading gains, most of the other positives including SP writebacks and a one-off special dividend (UOB’s 80th anniversary) appear unlikely to repeat.
Despite the earnings beat, we expect the credit cycle to be a challenge in ASEAN. However, we raise our estimates to factor in lower provisions, as reported in 3Q15.

Raise FY15-17 EPS by 2-7%, on reduced provisioning, and target price due to rollover. Upgrade from Reduce to Hold, as share price weakened in last 3 months.

3Q15 net profit (S$858m) beat our expectations and consensus, mainly due to one-off sales of investment securities.
Apart from that, 3Q reflected the slowdown in economic conditions and poor investment appetite, with:
1. flat loan growth qoq,
2. flat NIMs,
3. weaker fund management and WM fees,
4. marginally higher NPLs (1.3% vs. 1.2% in 2Q).
Gains aside, other positives were lower specific provisions and a special dividend.

Loan growth and net interest margins were flat qoq, the former dampened by currency effects (RM, Rp). UOB’s US$ trade loans expanded this quarter, but it moved away from low-margin corporate loans and allowed its S$ loan book to shrink. Loan growth was +1.9% YTD, marred by currency effects.
Management is keeping its 5% loan target this year, in local currency terms. Across the region, all territories face similar challenges i.e. how achieve asset growth in a slow environment and avoid asset quality issues.

3Q cost ratio (43.4%) only retreated because of the above S$100m investment gains. Ex-gains, 3Q cost ratio would have been as high as in 2Q (45.5%). Among the three banks, UOB’s absolute cost trend has risen ahead of peers, which is unusual.
Management cited these areas of cost pressure:
1. IT investment in digital banking, cyber-security, and
2. rising compliance costs.

NPL ratio rose marginally (1.3% in 3Q vs. 1.2% in 2Q). Total provisions (32bp of loans, -65% qoq) fell in 3Q on SP writebacks (Thai over-provisions previously). Biggest increase in new NPLs came from:
1. Singapore general commerce (working capital loans to trading-related companies),
2. building and construction (small developers), and
3. Indonesia transport (commodity sector malaise spreading to supporting industries).
Thai NPLs were lower in 3Q on NPL write-offs.

Three positives in this set of results were:
1. strong one-off investment gains,
2. special dividends, and
3. muted credit losses.
These, coupled with share price weakness since Jul, prompts us to revise our previous negative view on UOB.
We upgrade from Reduce to Hold. 3Q15 earnings outperformed but as quite a few of the positives appear one-off in nature, we are not inclined to chase the stock, especially at this initial point of the credit cycle.
Our target price is based on 1.06x CY16 P/BV, GGM. S$20.00.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2015-10-30

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