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.

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.

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.

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.

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.

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.

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