UOB - DBS Research 2016-07-29: Limited catalysts

UOB - DBS Research 2016-07-29: Limited catalysts UNITED OVERSEAS BANK LTD UOB U11.SI 

UOB - Limited catalysts

  • 2Q16 earnings were in line; NIM fell but loan growth was visible.
  • Outlook remains downbeat; keep watch on asset quality indicators; FY16-18F earnings cut to reflect lower NIM and softer non-interest income.
  • Turning on the tap for scrip dividends to shore up capital.
  • Maintain HOLD, TP lowered to S$17.70.



Limited catalysts, HOLD. 

  • Near-term concerns still lie in exposures to the oil & gas sector. While UOB’s exposure is relatively contained, the recent liquidation of an oil & gas company has spooked the market, instilling fears that there could be more to come. That said, the company was already in UOB’s watchlist. 
  • Management stated that the 32-bp credit cost guidance is sufficient for now. 
  • Separately, NIM is expected to be flattish from here while loans are still targeted at mid-single digit levels. Non-interest income growth is also expected to be muted. 
  • Collectively, with expected lower NIM, slower loan growth and non-interest income, our FY16-18F earnings are trimmed by 7- 11%. Our TP is correspondingly reduced to S$17.70.


2Q16 earnings in line; risks prevail. 

  • Although earnings were in line for 2Q16, NIM fell on account of lower short-term rates in Singapore, coupled with competitive loan pricing amid regional funding cost pressures. 
  • Positively, loans grew 1% q-o-q, 5% y- o-y arising from the construction sector. NPL ratio stood stable at 1.4%, highest among peers. 
  • Risks still prevail as there are still accounts deemed vulnerable. UOB pulled the scrip dividend trump card citing the need to buffer capital ahead of regulatory requirements.


Continued downbeat tone. 

  • Expect loan momentum to stay soft and NIM to remain flattish from here. Total credit costs are still guided at 32bps. There is more than sufficient excess general allowances as a buffer to manage its credit costs with general allowance reserve-to-total loans at 1.5%, highest among peers.


Valuation:

  • Our S$17.70 TP is based on the Gordon Growth Model, implying 1.0x FY16F BV. While UOB’s regional footprint in ASEAN is more complete vs peers, near-term headwinds, particularly in managing its funding cost and provisions, could hamper earnings growth.


Key Risks to Our View:

  • Further risk to asset quality. Prolonged weakness in oil prices could pose risks to 20% of its oil & gas exposure, potentially causing higher provisions and hence posing earnings risk.




LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-07-29
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 17.700 Same 18.80


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