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

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 
  • Maintain HOLD; S$18.80 TP


Missing links are not in the price. 

  • 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.

1Q16 in line; stable NIM and NPLs. 

  • 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.

Continued downbeat tone for FY16. 

  • 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.


Valuation:

  • 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.


Key Risks to Our View:

  • 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


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