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

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). 
  • TP trimmed to S$18.80 after earnings revision. 


Missing links are not in the price. 

  • 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. 

Continued downbeat tone for FY16. 

  • 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. 

Regionalisation and digitalisation remain in focus. 

  • 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. 

Valuation: 

  • 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. 

Key Risks to Our View: 

  • 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


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