UOB - RHB Invest 2016-07-29: NIM To Stay Narrow On Soft Interest Rates

UOB - RHB Invest 2016-07-29: NIM To Stay Narrow On Soft Interest Rates UNITED OVERSEAS BANK LTD UOB bank U11.SI 

UOB - NIM To Stay Narrow On Soft Interest Rates

  • Current low interest rates have contributed to a 10bps QoQ squeeze in NIM, and we have lowered our 2016 NIM expectation to 1.75%. 
  • We expect NPLs to rise through 2H16 on the weak economy, although asset quality was unchanged sequentially, with 2Q16 NPL ratio of 1.4%. 
  • We raise our FY16 net profit forecast by 1% and maintain NEUTRAL, with unchanged GGM-derived TP of SGD18.85 (0% upside). 
  • Interim dividend of 35 cents was declared.

Net interest margin (NIM) to remain narrow after 10bps sequential decline.

  • Net interest income contracted 5.1% QoQ due to sequential NIM narrowing of 10bps on the back of a declining interest rate environment. With interest rates seen to remain low in the near term, we have cut our 2016 NIM forecast to 1.75% (from 1.81%).
  • UOB expanded its 2Q16 loans by 1.4% sequentially, driven by a 4% QoQ rise for building and construction loans. Management guided for 2016 loan growth to be in the mid single-digit level, and we are forecasting 3%, on a weaker Singapore loan trend.

Expect stable credit cost. 

  • UOB recorded 2Q16 credit cost of 32bps, unchanged from 1Q16. 
  • New non-performing assets (NPAs) increased by SGD802m in 2Q16, compared with 1Q16’s SGD344m. 
  • Management indicated that the new non-performing assets in 2Q are mainly from the oil and gas sector. It sees the charge-off rate remaining forecast 2016 credit cost of 36 bps.

2Q16 net profit was 5% higher YoY. 

  • This is in line with 1H16 earnings, accounting for 55% of our forecast. 
  • Our GGM-derived TP of SGD18.85 factors in 9.9% cost of equity and 9.9% ROE. 
  • Risks to our forecasts include higher- than-expected impairment charges and weaker-than-expected NIMs.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-29
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 18.85 Same 18.85