United Overseas Bank Limited - Phillip Securities 2016-04-29: Loans Book Supported By Real Estate

United Overseas Bank Limited - Phillip Securities 2016-04-29: Loans Book Supported By Real Estate UNITED OVERSEAS BANK LTD U11.SI 

United Overseas Bank Limited - Loans Book Supported By Real Estate

  • 1Q16 net profit of S$766mn dropped 4.4% yoy driven by a 9.2% yoy rise in other operating expense and lower net gain from investment securities
  • Net interest income rose 6.1% yoy. 1Q16 NIM increased 2bps yoy to 1.78% (1Q15: 1.76%) but decrease 1bps on qoq (4Q15: 1.79%)
  • 1Q16 NPL was higher yoy at 1.36% (1Q15: 1.2%) but lower qoq (4Q15: 1.39%)
  • Downgrade to "NEUTRAL” with a lower TP S$18.15 (previously S$26.00) pegged at 0.95x FY16F PBR (not including preference shares)

How do we view this?

Building and construction and home loans remain the bulwark of loans growth

  • Building and construction and home loans remain the bulwark of loans growth, defying market sentiments while the other loans segments reflect the slowdown in the regional economy. 
  • 1Q16 building and construction loans grew 17.5% yoy and housing loans grew 4.5% yoy slightly offset by declines in financial institutions loans (-21.7% yoy), Professionals and private individuals loans (-1.4% yoy), manufacturing loans (-3% yoy) and transport, storage and communication loans (-7.8% yoy). 
  • Overall loans book increased by 3% yoy.

Unhealthy dependence on real estate construction loan growth. 

  • Management ascribed the growth in construction to private real estate construction. But considering the slew of public construction projects in the pipeline, we were surprised that the Public Private Partnerships did not take up a more significant role in that growth. 
  • Management is also sanguine about the housing loans in the near term but we prefer to be cautious as housing market is still experiencing a mismatch in bid and ask prices, new uncompleted sales will not immediately translate to loans due to percentage completion method recognition and sentiment is stymied by property cooling measures.

Singapore based loans driving loan growth higher. 

  • Geographically, Singapore registered customer loan based increased from 2.9% yoy; outperforming Malaysia (-1.5% yoy), Thailand (-0.2% yoy), Indonesia (-0.9% yoy) and Greater China (+1.2% yoy). 
  • Singapore based loans already comprise 56% of total customer loans therefore the growth figures make Singapore based building and construction loan and housing loan segments the predominant growth drivers.

Diversifying funding mix. 

  • Cost on customer deposits rose from 1.07% in 4Q15 to 1.15% in 1Q16 largely owing to increase in cost of USD funding. 
  • We continue to see challenges in the deposits markets because of competition and risks that interest rates can turn volatile unexpectedly. UOB may have sought to improve the mix and stability with an issue of a total of US$700mn 3.5% subordinated notes due 2026 in March. 
  • In addition, to optimise the overall funding costs within the Bank’s funding mix, UOB also issued a 5 year, 500mil EUR covered bond at 0.25% per annum in March. This is a good strategy that UOB can adopt to eschew outright competition for deposits and manage some unexpected upward pressure in funding costs.

Loan book performance undesirable either in rising or declining interest ratesenvironment in the short-term. 

  • Macroeconomic sentiments have become less dire just after the beginning of 2016 and SIBOR/SOR moved lower. As a result, prices of loans will experience an upper bound limit that caps margin expansions. 
  • On the other hand, a rise in SIBOR/SOR rates, though favourable for NIMs expansion has been in the last year, an outcome of global economic imbalances such as expectation of FED rates hikes and risk of capital outflows.
  • In a challenging economic environment, more borrowers are becoming tenuous in serving debt therefore loan rates that track the rising SIBOR/SOR breeds another set of worries wherein NPLs will rise much faster than expected. But this is not to say that rising interest rates or the reasons to raise rates are always bad, rather, we highlight that because growth of the global economy is still fragmented and imbalanced, interest rate decisions by policy makers may more often than not bring about undesired effects. 
  • Subjected to the current global economic zeitgeist, Singapore banks may find themselves in a quandary where neither rising rates nor declining rates present a clear and straight forward path to benefit its loan book.

Financial highlight

Total exposure to commodities including off-balance sheet items is S$21.8bn. 

  • Of the S$21.8bn, S$13bn is related to Oil & Gas wherein S$4.6bn is to upstream industries and S$8.4bn is to traders/downstream. The higher exposure compared to 4Q15 (S$12bn) is due to increased business to downstream/traders while business to upstream declined.

Total exposure to China is S$19.5bn less than 4Q15 (S$21bn). 

  • Of the S$19.5bn, S$10.1bn is exposed to the banking sector, 99% of the bank exposure has a tenor of less than a year and 75% of the bank exposure are to the top 5 domestic banks and policy banks. 
  • Another S$8.2bn are non-bank loans to top tier state owned enterprises, large local corporates and foreign investment enterprises. About half of these loans are denominated in RMB. There is minimal exposure to stockbroking companies linked to China’s stock market and no exposure to Qingdao fraud and local government financing vehicles.

Fees and commissions to lacklustre. 

  • Overall fee and commission income in 1Q16 was down 9.8% yoy and 4.5% qoq. The underperformance on a yoy basis was led by wealth management (-26.1% yoy) and loan-related income (-4.6% yoy). Both segments make up 44% of 1Q16 fee and commission income. 
  • As long as trepid regional economy outlook remains, fee and commission income growth would likely remain muted.

Investment Actions

  • In view of the above and with the change of analyst, we downgrade to "NEUTRAL” with a lower target price of S$18.15 (previously S$26.00)
  • Our new TP is based on 5% discount to FY16F book value (not including preference shares). This reflects muted loans growth prospect for most segments of the loans book. 
  • At the same time we are cautious that the loans growth driver is increasingly weighted towards Singapore home loans despite the lack of obvious growth catalyst in this segment.

Dehong Tan Phillip Securities | http://www.poems.com.sg/ 2016-04-29
Phillip Securities SGX Stock Analyst Report NEUTRAL Downgrade ACCUMULATE 18.15 Down 26.00