United Overseas Bank UOB - Maybank Kim Eng 2016-07-29: Upside capped

United Overseas Bank UOB - Maybank Kim Eng 2016-07-29: Upside capped UNITED OVERSEAS BANK LTD UOB bank U11.SI 

United Overseas Bank (UOB SP) - Upside capped

1H16 results within expectations

  • 1H16 core PATMI of SGD1,566m (0% YoY) was within our expectation. 
  • Results reflected soft revenue trends, capital constraints and broad- based asset-quality deterioration. Interim DPS was SGD0.35. 
  • We raise FY16E net profit by 2% on lower costs (2016E CIR: 46% vs 48% previously) and cut FY17-18E net profits by ~1-2% due to lower profit prospects. 
  • Our TP lifted to SGD18.34 after rolling forward to FY17E BVPS on ~0.9x FY17E P/BV. The 0.9x book value is maintained (sustainable ROE of 9.6%, COE of 10.1% and growth rate of 3.5%). 
  • Maintain HOLD. 
  • We prefer UOB on its lower exposure to O&G sector/China.

Lower rates, capital constraints

  • UOB has 52% of loans denominated in SGD, of which ~40% are SIBOR/SOR- linked. Therefore, NIMs declined by 10bps QoQ to 1.68% (1Q16: 1.78%) and customer spreads fell 13bps QoQ to 2.23%. 
  • Management continue to guide flat NIMs for 2016E, with margin compression to ease and lower cost of funding in the next few quarters. 
  • Fully loaded CET1 ratio improved 10bps QoQ to 12.2% (1Q16: 12.1%, 2Q15: 12.5%), close to Group’s comfort level. To bolster capital in view of rising RWAs from Basel and regulatory requirements, the scrip dividend scheme is now being applied to the interim DPS.

NPLs have not peaked

  • Group NPLs were stable at 1.4% but new NPA formation of SGD802m suggests NPLs have not peaked. NPLs continue to migrate to more serious loan grading categories (Substandard: +3% QoQ, Doubtful: +61% QoQ). 
  • Management remains comfortable with credit costs at 32bps for FY16 but we think it is still early in the credit cycle and expect credit costs of 36- 40bps in FY16-17E. 
  • Among peers, UOB has the lowest exposure to the problematic O&G upstream/support sector, at 2% of loans.

Maintain HOLD

  • As mentioned, we raise TP to SGD18.34 after rolling forward, based on ~0.9x FY17E P/BV, close to 1SD below historical mean to reflect lower ROE forecasts. 
  • Catalysts include: 
    1. a stable market/economy; 
    2. higher re-pricing from rate hikes; and 
    3. RWA optimisation.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-29
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 18.34 Up 16.96