UOB - DBS Research 2016-02-16: Staying conservative

UNITED OVERSEAS BANK LTD UOB U11.SI

UOB - Staying conservative

4Q/FY15 earnings in line; higher NIM, moderate loan growth, higher provisions were key features.
Total oil & gas exposure is at 4% of total loans; of which 20% is deemed vulnerable.
Earnings trimmed on slower loan growth and flat NIM; we have already imputed higher credit costs (FY16F: 36bps).

UOB has been known for its conservative growth but we believe the market may have overlooked the lack of its fee income differentiation as well as Greater China presence.
We believe over time, regionalisation beyond ASEAN would need to improve and a stronger traction in non-interest income away from loan-related activities to prompt a re-rating for the bank.
UOB is more Singapore-centric compared to peers with 52% and 48% of its loans and deposits being S$ based respectively.
While this is not necessarily a weakness, it would remain a point of contention when peers are able to reap better contribution from overseas operations in future. These factors justify our HOLD rating.

Expect loan momentum to stay soft and NIM to remain flattish from here now that sentiment on further rate hikes has eased.
Total credit costs are still guided at 32bps but in a worst-case scenario, management hinted that it could go up to 35-40bps.
Management also hinted that there is S$3bn worth of excess general allowances as a buffer to manage its credit costs.
Within the region, Indonesia is still expected to remain challenging but its operations make up just a mere 3% of total portfolio.

We note that its regional corporate banking strategy has gained traction, though in a different manner from its peers which have largely tapped on trade finance.
Although Indonesia and Thailand economies remain vulnerable in the short term, UOB maintains its position to grow its regional franchise.
UOB continues to participate in growth segments in Malaysia albeit selectively.
Most investments in new digital products have been completed. Going forward, emphasis on cyber security would be a priority.

Our S$18.80 TP is based on the Gordon Growth Model, implying 1.0x FY16F BV.
While UOB’s regional footprint in ASEAN is more complete vs peers, near-term headwinds, particularly in managing its funding cost and provisions, could hamper earnings growth.

Further risk to asset quality.
Prolonged weakness in oil prices could pose risks to 20% of its oil & gas exposure, potentially causing higher provisions and hence posing earnings risk.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-02-16

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 18.80 Down 19.20