United Overseas Bank - CIMB Research 2015-12-09: Headwinds from ASEAN

United Overseas Bank - CIMB Research 2015-12-09: Headwinds from ASEAN UNITED OVERSEAS BANK LTD UOB bank U11.SI 

United Overseas Bank - Headwinds from ASEAN 

  • Biggest exposure to a slowing ASEAN among Singapore banks, which could lead to near-term challenges in loan growth and asset quality. 
  • Over the longer term, could be a prime beneficiary of increased intra-regional trade flows with the establishment of AEC. 
  • Maintain Hold, with a GGM-based target price of S$20.00 (1.06x CY16 P/BV). 
  • Remains our least favourite Singapore bank for its least resilient asset quality. 

■ Near-term headwinds from ASEAN to persist 

  • UOB has the biggest exposure to South and Southeast Asia, at 22% of loans (DBS: 10%, OCBC: 21%). 
  • ASEAN has seen challenges which we expect to persist in the near term: 
    1. The softer economic outlook and political uncertainty has led to slower loan demand in Malaysia and Indonesia as businesses hold back on investments. 
    2. Weakening of ASEAN currencies against the S$ has led to lower translated loan balances. 
    3. Asset quality continues to deteriorate amid lower commodity prices. 

■ Credit quality likely to remain the worst among the three banks 

  • We expect UOB’s credit cost to spike to 65bp in 2016 (3Q15: 32bp), higher than DBS’s 40bp and OCBC’s 38bp. 
  • UOB has traditionally seen the worst credit quality in a downturn, and we expect the same this cycle given that has a larger proportion of SME loans vs. MNCs. 
  • We continue to expect a broadening out of NPLs across sectors in ASEAN for UOB into 2016. 

■ Escalating costs amid a slowing environment 

  • While competitors DBS and OCBC have been stepping up investments in technology to stay relevant amidst the emergence of FinTechs, UOB has been late to the game, and is now seeing rising cost pressures from investments in digital banking, IT systems, cybersecurity and also compliance. 
  • In an environment where loan growth is slowing and fee engines are faltering, escalating costs from technology investments and loan loss provisions do not bode well for UOB’s near-term outlook. 

■ Beneficiary of AEC in the longer term 

  • Looking past near-term challenges, we think UOB’s ASEAN presence will allow it to benefit from the ASEAN Economic Community (AEC) in the longer term. 
  • As trade barriers are lifted, we think UOB’s geographical reach across Malaysia, Thailand and Indonesia will allow it to benefit from increased intra-regional trade flows in ASEAN, in terms of trade loans, trade fees, loan-related fees and treasury customer income. 

■ Maintain Hold 

  • We maintain a Hold call on UOB, with a GGM-based target price of S$20.00 (1.06x CY16 P/BV). 
  • UOB remains our least preferred Singapore bank as it has the poorest asset quality and lacks growth engines.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 20.00 Same 20.00