United Overseas Bank - CIMB Research 2016-04-28: Asset quality fine, for now

United Overseas Bank - CIMB Research 2016-04-28: Asset quality fine, for now UNITED OVERSEAS BANK LTD UOB bank U11.SI 

United Overseas Bank - Asset quality fine, for now

  • 1Q16 net profit of S$766m in line at 27% of our FY16 forecast and consensus. 
  • NII in line, but topline and PPOP dragged by lower WM and loan-related fees. 
  • NIM fell 1bp qoq to 1.78% but due to strong deposit growth (+6%) vs. loans (+1%). 
  • Asset quality better than expected, with NPL ratio stable at 1.4%. S$30m of SPs recognised for commodity-related NPLs, offset by S$23m write-back of GPs. 
  • Maintain Hold, with a lower GGM-based target price of S$18.74 (0.98x CY16 P/BV). We tweak our EPS on lower fees and deferment of provisions to FY17-18. 

■ Lower provisions offset by lower fee income and associate losses 

  • 1Q16 net profit of S$766m was smack in between ours (S$765m) and consensus (S$767m). 
  • NII (-0.2% qoq) was in line, but topline (-5% qoq) was below on lower fees (- 10% qoq) as loan-related and wealth management fees dried up. 
  • The key positive surprise was lower provisions of S$117m (-39% qoq) as UOB wrote back S$23m of GPs on its debt portfolio. This was, however, doused by $30m MTM losses on a legacy investment in an ASEAN-focused fund, bringing net profit in line with our estimate. 

■ Loans +1% qoq, deposits +6% qoq, LDR -4% pts 

  • Lacklustre loan growth (+1% qoq) was no surprise, with mortgages and building & construction driving the increase. Deposits rose faster at 6% qoq (mainly S$ and US$), due to a temporary blip in fund flows into escrow accounts, while fixed deposits also rose. LDR fell to 80.7% (4Q: 84.7%) as a result. UOB controlled wholesale lending in 1Q, but will look to grow its book by improving utilisation of credit lines when it is more comfortable with the environment. This should improve loan-related fees as well. 

■ NIM -1bp qoq on lower LDRs, though loan spreads improved 

  • NIM fell 1bp qoq to 1.78%, largely due to the lower LDR. 
  • Customer loan spreads actually improved 2bp qoq, even with expensive fixed deposit collection which brought CASA ratio down to 42.8% (4Q: 44.6%). 
  • Management guided for flat NIMs in FY16, with headwinds from: 
    1. falling SOR (c.25% of S$ loans), 
    2. scaling back of higher-margin commercial banking loans, and 
    3. limited rate hikes by the Fed. 

■ Asset quality surprises on upside but likely to be transitory 

  • NPL ratio was stable at 1.4%, while coverage ratio rose to 133% (4Q: 131%). 
  • New NPL formation was c.S$300m, which was almost equally netted off by restructuring and writeoffs to keep NPLs at S$2.8bn. New NPLs were mainly from commodity exposures in Canada and Australia relating to the mining industry, and UOB also recognised S$31m of SPs for the customer. 
  • Guidance was for 32bp of provisions to be enough but we take a more cautious view and expect provisions to increase to 42-50bp in FY16-17. 

■ Maintain Hold 

  • We keep our Hold call with a lower GGM-based target price of S$18.74 (0.98x CY16 P/BV) as we tweak our EPS to factor in lower fees and associates, and as we defer loan loss provisions to FY17-18. 
  • While stable asset quality in 1Q lent some comfort, we think it is still early in the credit cycle and deterioration will start to show up. 
  • Little NIM upside and lacklustre loan and fee income growth make it difficult for us to take a positive view.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-04-28
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 18.74 Down 19.31