United Overseas Bank - CIMB Research 2016-07-28: Severe fall in NIM, but loan growth intact

United Overseas Bank - CIMB Research 2016-07-28: Severe fall in NIM, but loan growth intact UNITED OVERSEAS BANK LTD UOB bank U11.SI 

United Overseas Bank - Severe fall in NIM, but loan growth intact

  • 2Q16 net profit was broadly in line at 26% of our and consensus full-year forecasts.
  • The glaring standout was a 10bp contraction in NIM, due to higher sensitivity than peers to the fall in SIBOR and SOR. NII fell 5% qoq as a result.
  • Non-NII beat our forecast on higher wealth management fees and trading.
  • NPL ratio stayed flat, while credit costs were manageable at 32bp of loans.
  • Maintain Hold with a lower GGM-based target price of S$18.52 as we trim our FY16-18F EPS on lower NIMs, partially offset by higher fees.

NIM fell 10bp qoq on lower SIBOR and interbank rates

  • 2Q16 net profit of S$801m (+4% qoq, +5% yoy) was a decent performance amid a 10bp qoq fall in NIM. 
  • Management explained that more than half the 10bp drop was attributed to the fall in SIBOR and SOR, as 40% of its Singapore loans are pegged to the two benchmark rates. 
  • While there remains pressure on NIMs, UOB is focusing on liquidity management to prevent a drag on its balance sheet. 
  • Cost of funds should improve in 3Q, while it also has room to benefit from active placements of funds on the interbank.

Loan growth still has legs

  • The impact of lower NIM on NII (-5% qoq) was partially offset by loan growth of 1.4% qoq. 
  • We are encouraged that UOB has stronger loan growth than peers, due to its lower China trade exposure, its growing FI business and steady S$1bn/quarter growth from consumer/private bank loans. 
  • Building & construction loans grew 4% qoq from funding Malaysian infrastructure projects and global funds’ property projects.

Non-NII surprised positively on WM and trading

  • Fees grew 10% qoq, led by a recovery in wealth management (WM) fees (+29% qoq) after a soft 1Q. 
  • WM AUM rose 6% yoy to S$88bn, led by growth in the high net worth segment. UOB is targeting AUM of S$90bn by year-end. 
  • Credit card fees also had a decent quarter (+10% qoq), as UOB gained market share in spending, particularly in the F&B, e-commerce and cross-border segments. 
  • Trading had a surprisingly good quarter (+31% qoq) and helped to lift the overall non-NII growth to 17% qoq.

Asset quality remains steady, more oil & gas NPLs

  • NPL ratio was stable at 1.4%. Total credit costs remained steady at 32bp, and guidance is for current levels to be sustainable in FY16. 
  • New NPA formation of S$802m was more than double of last quarter, and came mainly from proactive steps taken for vulnerable accounts in the oil & gas sector (Swiber was one of the accounts). This was offset by higher-than-usual upgrades and recoveries of S$548m, of which c.S$200m came from a subsidiary in Australia. 
  • Allowance coverage ratio remained healthy at 126% (1Q: 133%).

Maintain Hold

  • We maintain Hold, with a slightly lower GGM-based target price of S$18.52 as we trim our EPS on lower NIMs, offset by higher fees. 
  • We think the impact of lower SIBOR and SOR has largely been seen in 2Q, and UOB has some room to boost NIMs through active balance sheet management and improving asset yields from placements on the interbank. 
  • Better-than-peers loan growth should also bolster NII downside from NIM contraction. At 1x P/B, we think it is fairly valued for forecasted ROE of 10%.

Kenneth NG CFA CIMB Securities | Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-07-28
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 18.52 Down 18.74