UOB - OCBC Investment 2016-04-28: Soft Outlook Ahead

SGinvestors.io

UNITED OVERSEAS BANK LTD U11.SI 

UOB - SOFT OUTLOOK AHEAD 

• 1Q net earnings of S$766m 
• Lower Non-interest Income 
• Cut to Hold 

1Q16 in line with market expectations 

• UOB posted 1Q16 net earnings of S$766m, -4.4% YoY and -2.8% QoQ, but in line with a Bloomberg poll of S$767m. 
• The decline was mainly due to lower Fee Income, income from Investment Securities, Trading Income as well as losses from Associates. 
• Allowances came off from S$169m in 1Q15 and S$190m in 4Q15 to S$117m in 1Q16. 
• Net Interest Margin (NIM) came off QoQ from 1.79% in 4Q15 to 1.78% in 1Q16. 
• NPL ratio was stable QoQ at 1.4%. 

Exposures to China and Commodity remained fairly stable QoQ 

• Total exposure to China amounted to S$19.5b or 5.9% of total assets, and slightly down from S$21.1b in the previous quarter. 
• Of the non- bank exposure in China, the NPL ratio is at around 0.9%, down slightly from 1.0% in the previous quarter. 
• Total exposure to commodities amounted to S$21.8b as of March 2016, up slightly from S$21.0b in the previous quarter. 
• Of the outstanding loans in this segment, about 4% of total loans are to the Oil & Gas sector versus 3.6% previously. The increase of S$1.2b was due to traders and downstream O&G segments. 

Downgrade to HOLD; FV of S$20.05 

• While oil prices and regional equity markets have rebounded from recent lows, headwinds remain in the region for the rest of the year. This is likely to result in market volatility, which could impact UOB’s fee, trading and wealth income. 
• While its balance sheet is still fairly healthy, we note that economic and corporate slowdown could mean a protracted period of slow or no corporate growth. 
• Management is mindful of this, and the emphasis is on managing costs, selective loans growth and growing its retail revenue. 
• As the local construction and property markets are still trapped in the current doldrums, growth outlook for the Singapore market is also fairly lacklustre. NIM is likely to stay flat. 
• Since our last report, UOB has done well and gained some 6%. 
• We have cut our earnings projections for FY16 and FY17 and using the same valuation peg, our fair value estimate drops marginally from S$20.15 to S$20.05. 
• We are downgrading UOB to a HOLD.

Carmen Lee OCBC Securities | http://www.ocbcresearch.com/ 2016-04-28

OCBC Securities SGX Stock Analyst Report HOLD Downgrade BUY 20.05 Down 20.15