UOB - DBS Research 2016-04-28: Still cautious

UNITED OVERSEAS BANK LTD UOB U11.SI

UOB - Still cautious

1Q16 earnings in line; but dragged by slower non- interest income traction; provisions and NPLs were stable
Exposure to commodities was largely unchanged
Cautious stance maintained for the year

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 would be needed to prompt a re-rating for the bank.
UOB is more Singapore-centric compared to peers, with 53% 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 the future. These factors justify our HOLD rating.

Although in line, key highlights for UOB’s 1Q16 earnings are lower loan-related and wealth management fees, as well as lower trading income due to soft markets.
NIM was largely stable q-o-q. The spurt in deposit growth was due to transaction flows which were in escrow accounts.
Loan growth remained sluggish. Positively, UOB’s NPL ratio stood stable. Provisions were lower largely due to general provision writebacks. UOB’s general provision reserves-to-total loans are at a high of 1.5%.
Capital ratios were lower as risk- weighted assets grew at a quicker pace.
Commodity exposure (including oil & gas) was largely unchanged.

Expect loan momentum to stay soft and NIM to remain flattish from here. Total credit costs are still guided at 32bps. There is more than sufficient 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 a mere 3% of total portfolio.

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.

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/ 2016-04-28

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 18.80 Same 18.80