UOB - RHB Invest 2016-02-17: Fundamentals Healthy But NPL Risk Persists

UOB - RHB Invest 2016-02-17: Fundamentals Healthy But NPL Risk Persists UNITED OVERSEAS BANK LTD UOB bank U11.SI 

UOB - Fundamentals Healthy But NPL Risk Persists 

  • UOB’s FY15 results were within expectations. 
  • NEUTRAL rating maintained with lower TP of SGD19.10 (from SGD21.70, 7% upside). 
  • Although earnings dipped 1%, balance sheet is healthy while rise in NPLs remained manageable. 
  • At 0.95x adjusted FY16F P/BV (-1SD historical mean), valuation is undemanding, in our view. 
  • Investor concerns over asset quality and weak earnings outlook, however, would limit share price rerating.

NEUTRAL maintained, TP lowered. 

  • UOB’s 28% drop in share price since Jan 2015 has taken its adjusted FY16F P/BV to 0.95x (-1sd historical mean). 
  • Given that we do not expect credit cost to spike above 200 bps, which would wipe out earnings and impact book value, valuation is unlikely to fall to 2008 low of 0.8x P/BV. 
  • Share price upside would, however, be capped by concerns over still rising NPLs and weak revenue outlook. 
  • Our revised GGM-based TP of SGD19.10 implies FY16F P/BV of 1.01x and P/E of 9.9x. 

O&G exposure manageable. 

  • UOB has total exposure of SGD12.1bn to the oil & gas (O&G) industry as at Dec 2015. 
  • Management is concerned about the bank’s exposure to the upstream industries but believes that asset quality would remain manageable and exposures are well collateralised. 
  • Management estimates about SGD2.0bn of exposure would be vulnerable should oil price stay low for > 1 year and this would push credit cost to 40 bps (FY15: 33 bps). 

FY16F core earnings to dip 4% on higher provisions. 

  • We have downgraded our FY16F-17F earnings by 10% after factoring in higher credit cost. 
  • We forecast flattish pre-impairment operating profit (PIOP) for FY16F on dull top line outlook – stable net interest margin (NIM) but slower loan growth of 3.5%, and a 1% dip in non-interest income. 
  • A higher credit cost of 40 bps would see core net profit stay on a downtrend in 2016. 

Fully loaded CET-1 has edged lower. 

  • UOB’s Basel III fully loaded common equity tier 1 (CET-1) declined to 11.7% (Sep 15: 12.2%) due to stronger growth in risk weighted assets (RWA). 
  • Although we do not see an immediate need for fresh equity, UOB needs to grow capital to keep its CET-1 ratio close to those of regional peers, in our view. 

FY15 results within expectations. 

  • Core net profit of SGD3.21bn (-1.2% YoY) was in line with our and consensus estimates. 
  • Operating income grew 8% YoY on improved net interest margin (NIM), higher fee income and gains from investment securities. But a 14% jump in operating expenses and higher impairment charges led to the earnings slippage. 
  • Noticeable rise in NPLs in Singapore, Indonesia and China but NPL ratio remained manageable while loan loss coverage is comfortable. 
  • Liquidity is healthy as management focused on growing current account and savings account (CASA) deposits. 
  • Reported ROE fell 1.3ppts to 11%. A final DPS of SGD0.35 was proposed.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-17
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 19.10 Down 21.70