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

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 beat solely due to strong trading-related income 

  • 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 margin outlook 

  • 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. 

Cost challenges 3Q total expenses were up (+13% yoy, +3% qoq). 

  • 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. 

New areas of asset quality deterioration, small but showing up 

  • 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. 

Weaker share price triggers upgrade 

  • 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
CIMB Securities SGX Stock Analyst Report HOLD Upgrade REDUCE 20.00 Up 18.23