UOB - OCBC Investment 2016-07-29: Near Term Pressure

UNITED OVERSEAS BANK LTD U11.SI

UOB - NEAR TERM PRESSURE

UOB posted 2Q16 net earnings of S$801m, +5.1% YoY and +4.6% QoQ, and marginally ahead of market estimate of S$798m. This was largely driven by higher Non-interest Income, which rose 13.9% YoY and 17.0% QoQ to S$813m, and benefited from higher trading gains.
Net Interest Margin (NIM) eased from 1.77% in 2Q15 and 1.78% in 1Q16 to 1.68% in 2Q16. NPL ratio stayed stable for three quarters at 1.4%. Allowances increased 37% from last quarter to S$161m this quarter.
An interim dividend of 35 cents has been declared and the scrip dividend scheme will apply to the interim dividend.

Its exposure to China remained flat from last quarter at around S$19.5b. Total exposure to commodities (including oil and gas) grew from S$21.8b last quarter to S$22.8m this quarter or 7.5% of total loans.
Total exposure to Europe stood at S$7.7b as of Jun 2016 or 2.4% of total assets.
While management is fairly positive on its wealth management and credit card business, outlining its plans to grow AUM (S$90b) and explore fee opportunities, the challenging global environment and low global interest rates will continue to stifle growth.
Loans growth for this year is likely to be in the low single-digit level and NIM is likely to stay near the level seen in 2Q16 as China, Malaysia and Singapore are experiencing margin pressure.

Despite oil rebounding from recent low, the operating conditions for the local oil & gas sector remain tough and this is likely to dent UOB’s share price performance in the short term due to its exposure to the beleaguered sector.
We have cut our FY17 estimates from S$3237m to S$3119m, and using currently lowered peers’ comparison, our fair value estimate drops from S$20.15 to S$19.61.
Maintain HOLD.

Carmen Lee OCBC Securities | http://www.ocbcresearch.com/ 2016-07-29

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 19.61 Down 20.15