UOB - RHB Invest 2016-04-29: Asset Quality Stable But Non-Interest Income Fell

UOB - RHB Invest 2016-04-29: Asset Quality Stable But Non-Interest Income Fell UNITED OVERSEAS BANK LTD UOB bank U11.SI 

UOB - Asset Quality Stable But Non-Interest Income Fell

  • UOB’s asset quality stabilised in 1Q16 as restructuring of loans led to healthy repayments and reclassification of impaired loans. This suggests that our projected credit cost for the year is sufficient. 
  • Still, we expect topline growth to be muted due to modest loan growth, flattish NIM and lower non-interest income. 
  • 2016F P/BV of 0.9x is below -1SD historical mean but broadening weakness in the domestic economy would continue to weigh on investor sentiment. 
  • Maintain NEUTRAL and SGD19.10 TP (1% upside).

1Q16 results highlights. 

  • Earnings fell mainly on lower wealth management and loan-related fees, and drop in trading gains. 
  • Key positives were stable asset quality with absolute impaired loans unchanged from Dec 2015 and 40bps QoQ rise in fully loaded common equity tier 1 (CET1) ratio to 12.1%. 
  • On the flipside, specific allowances on loans rose 15% QoQ, but were offset by a write-back of excess non-loan general allowances.


  • We believe United Overseas Bank’s (UOB) key focus in 2016 would be on asset quality and liquidity. 
  • Management expects gross impaired loans to rise further, but the increase would be manageable. The bank is also hopeful the operating environment would stabilise, allowing for stronger revenue growth in 2Q-3Q, and stable credit cost of 35bps. 
  • Net interest margin (NIM) would likely be flattish, as US interest rates are expected to rise at a measured pace.

Forecasts and investment case. 

  • We leave our earnings projections and GGM-derived TP of SGD19.10 unchanged. 
  • Our TP is based on a 2016F P/BV of 1.02x, which is below -1SD historical average. 
  • UOB’s share price has been flattish YTD and we believe the stock would continue to trade below the historical mean due to the absence of any positive re-rating catalyst.
  • Downside risks include sharper-than-expected deterioration in asset quality and weaker-than-expected net interest margin. 
  • Key upside risks include better- than-expected fee income and net interest income growth.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-04-29
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 19.10 Same 19.10