United Overseas Bank UOB - Maybank Kim Eng 2016-02-17: Murphy’s Law?

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UNITED OVERSEAS BANK LTD UOB bank U11.SI 

United Overseas Bank (UOB SP) Murphy’s Law? 

Cheap valuation is not reason for upgrade 

• UOB’s FY15 results offered no incentive to upgrade our recommendation. 
• We are unfazed that core PATMI of SGD3,208m (-1.2% YoY) was below our expectations. 
• During times of economic adversity, provisions are lumpy and earnings prone to volatility. But current landscape suggests that the worst may not be over. 
• Heightened global risks aside, we see potential downside to asset quality, earnings and growth prospects ahead. 
• A drop in fully loaded CET1 could cut back lending or add to capital requirements, a new factor in the equation. Cheap valuation is not sufficient to justify buying into the shares. 
• We cut our net profit estimates by 11-17% for FY16/17. 
• Maintain HOLD with SGD16.96 TP, based on 0.9x FY16 P/BV, 1.5SD below the 10-year mean. 

More pain ahead 

• Asset quality issues have started to bite. Total NPLs were at 1.4% at end 2015. 
• Indonesia reached 4.9% NPLs, Greater China 0.9% and Singapore 1%. There is more to come because Greater China’s deterioration (6.6% of assets) has not yet surfaced. 
• Of SGD21b exposure to commodities, SGD12b is to the O&G sector. 
• UOB’s own stress test showed a further 20% (~SGD2b) is vulnerable if oil prices stay low. 
• Provisions have not been made. We suspect that the stress tests are linear in nature and should a confluence of low commodity prices, a larger scale credit event and prolonged bleak economic outlook occur, defaults could be much higher. 

Clarification on loan commitment 

• Revised recognition of undrawn credit facilities following MAS’s reclassification on definition of RWA to include loan commitments has prompted fully loaded CET1 to drop from 12.2% to 11.7% QoQ. The clarification, while prudent, is untimely; Singapore banks are comfortable with operating at a ratio >12%. 
• Within the sector, a small liquidity event might prompt the need for capital raising, which would be negative for the sector. 
• Trough valuation within sight UOB is now trading just above its trough valuation based on forward P/BV vs. the GFC and Euro debt crisis in 2011 (table right margin). The current sell-off has also brought the shares close to our trough TP.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-17

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 16.96 Same 16.96