UOB - OCBC Investment 2016-02-16: Concern Over O&G Exposure

UOB - OCBC Investment 2016-02-16: Concern Over O&G Exposure GENTING SINGAPORE PLC G13.SI 


 Earnings were largely in line 
 Upstream O&G industries exposure 
 Drop FV to S$20.15 

4Q15 was slightly better than our estimate 

  • UOB posted 4Q15 net earnings of S$788m, in line with Bloomberg consensus, but slightly above our projection by S$20m. 
  • Net Interest Margin (NIM) improved from 1.69% in 4Q14 and 1.77% in 3Q15 to 1.79% this quarter. 
  • As expected, there was an increase in allowances for credit and other losses which rose 15% YoY or 19% QoQ to S$190m in 4Q. 
  • A final dividend of 35 cents was declared and together with the interim dividend and special dividend, the full year’s payout amounted to 90 cents. 

China exposure of S$21.1b or < 7% of total assets 

  • With the recent concern over China, UOB shared that its exposure to China amounted to S$21.1b or about 6.6% of total assets. Of the S$11b bank exposure to China, 65% is trade-related with bank counter-parties and around 75% is with the top 5 domestic banks and policy banks. 
  • Management shared that they are comfortable with its exposure in China as it deals mainly with top tier domestic banks and state-owned enterprises. 

Commodity exposure of S$21b or 10% of total loans 

  • Its commodities exposure amounted to S$21.0b or about 10.3% of total loans or 6.6% of total assets. 
  • Management is more concerned about its exposure to the upstream industries in the Oil & Gas sector, which amounted to a total exposure of S$5.0b as some of the companies in this sector may be facing cash flow problems due to current depressed oil prices. 
  • It estimated that about S$2b may be vulnerable if oil prices stay low, but as clients are still servicing their loans, these have not been re-classified. 

Lowering FV from S$21.65 to S$20.15 

  • Management is guiding for single-digit loans growth and for NIM to hold at current level. 
  • We have adjusted for higher allowances and lower earnings estimates, especially for FY17. 
  • With the recent selldown in regional markets and the lower valuations for regional banks, which are trading at around 0.9x book and 9x earnings, we have also lowered the valuation peg for UOB, dropping our fair value estimate from S$21.65 to S$20.15 (1x FY16 book). 
  • Maintain BUY.

Carmen Lee OCBC Securities | http://www.ocbcresearch.com/ 2016-02-16
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 20.15 Down 21.65