United Overseas Bank - CIMB Research 2016-02-16: The credit cycle starts

United Overseas Bank - CIMB Research 2016-02-16: The credit cycle starts UNITED OVERSEAS BANK LTD UOB bank U11.SI 

United Overseas Bank - The credit cycle starts 

  • 4Q15 NP in line with ours, above consensus. FY15 was at 100% of our forecast. 
  • Topline exceeded our estimate. NII rose 3.4% on 2bp margin expansion (mostly Singapore, Malaysia) while trading had a good quarter, seasonally adjusted. 
  • Strong NII and trading kept 4Q PPOP ahead, even with one-off costs. 
  • Main focus is on asset quality. NPL edges up (1.4%) on increases across sectors. Total allowances stay at 32bp of loans but in 4Q, this is mostly specific allowances. 
  • Our GGM-based target price (1.06x P/BV) is trimmed on FY17-18 EPS cuts. 

■ The credit cycle starts 

  • 4Q15 confirms that the credit cycle has started. NPL rose for a consecutive quarter (4Q: 1.4%, 3Q:1.3), broad-based across sectors. 
  • Although 4Q total provisioning stayed at 32bp of loans, SP formed the bulk (22bp). SPs increased in Singapore, Greater China and Indonesia. 
  • Our total provisioning forecast for 2016 is a doubling of current levels. 

■ Topline ahead of expectations on strong trading-related income 

  • 4Q net profit of S$788m was within our expectations (S$770m) but above consensus (S$749m). 4Q topline was flat qoq, but up 12.5% yoy. 
  • A flat performance in a seasonally weak quarter is not bad at all. The topline surprised on stronger net interest income (NII) and trading-related income. Fee income (-1% qoq) also held up relatively well. 

■ Loans rose 2% qoq, deposits shrank 1.7% qoq, margins up 2bp 

  • NII rose nicely on 2% qoq loan growth and 2bp NIM expansion. 
  • The margin expansion took place in Singapore and Malaysia, as loans continued to re-price upwards. Thailand and Indonesia continued to see margin erosion. 
  • We believe the margin expansion is partly explained by some deposit shrinkage (-1.7% qoq). 
  • Importantly, even as the S$ LDR edges up (91.7%), the more important LCR metrics are all improving. 

■ PPOP ahead, despite presence of small one-off costs 

  • With strong NII and trading, pre-provision operating profit (PPOP) still came in ahead of our expectations, despite the presence of one-off costs this quarter. 
  • 4Q included S$43m of one-off costs relating to SG50 and UOB80 celebrations (FY15: S$67m), which hiked the cost ratio up to 46%. 
  • Adjusted for these, 4Q cost ratio was at a more reasonable 44%. 
  • An above-expectations PPOP was eventually doused by higher provisions though. 

■ Explaining exposure to China and commodities 

  • Management took pains to explain their exposure to China and commodities. 
  • Out of S$21.1bn (6.6% of total assets) exposure to China, 52% is to banks, 41% to non-banks. 
  • The exposure to banks is mostly short-term (99% < 1 year), to top five domestic banks (75%) and trade-related (65%). 
  • Exposure to non-bank is mostly to top SOEs, its NPL ratio (1%) is lower than group NPL. 
  • The exposure to commodities (S$14.8bn, 7% of group loans) is mostly to traders and downstream segments. 

■ Maintain Hold, FY16 EPS raised as we defer some allowances back 

  • We maintain our Hold rating. 
  • Our new target price of S$19.31 (1.06x CY16 P/BV, GGM) is trimmed on EPS cuts. Although 4Q results were not bad and share price has de-rated to 1x P/BV (attractive valuations), the start of a credit cycle is not a good time to take exposure to developing ASEAN struggling with the aftermath of low commodity prices.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-02-16
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 19.31 Down 20.00