UOB - RHB Invest 2016-07-05: Loan Growth Trends Not Bright

UOB - RHB Invest 2016-07-05: Loan Growth Trends Not Bright UNITED OVERSEAS BANK LTD UOB bank U11.SI 

UOB - Loan Growth Trends Not Bright

  • We lower our TP to SGD18.85 (from SGD19.10, 2% upside), as we cut our loan growth expectations. 
  • Expected slower economic growth, which will be worsened by Brexit, has led us to cut UOB’s 2016 loan growth assumption to 0.5% (from 3%). We forecast NPL ratio to keep rising over the next few quarters, with a 2% assumption by end-2017, up from 1.4% as at 1Q16. 
  • Factoring all these in, we lower our 2016 and 2017 net profit forecasts. The counter remains unexciting and we maintain our NEUTRAL call. This report marks the transfer of coverage to Leng Seng Choon.

Asset quality seen to deteriorate further in 2H16. 

  • United Overseas Bank’s (UOB) oil & gas loans typically account for 4% of its total loans. Including other commodity segments, exposure is 7% of the bank’s loans, and the oil price recovery should have helped to stabilise this portfolio. We believe 2Q16’s asset quality should deteriorate only marginally from 1Q16 levels (1Q16’s non- performing loan (NPL) ratio was 1.4%. However, the economic outlook remains uncertain on the back of:
    1. Brexit;
    2. Singapore’s Purchasing Managers’ Index (PMI) recording 49.6 in June. This is a second straight month of contraction and a reading below 50 indicates a contraction.
    Hence, we have assumed higher NPL ratios in subsequent quarters (1.8% by end-2016). Our 2016 credit cost assumption is 37bps (1Q16: 32bps). This is consistent with Moody’s Singapore banks outlook downgrade last week.

Loan growth forecast has been cut. 

  • Management is guiding for mid single-digit loan growth for 2016. In light of the weakening systemic loan growth of -1.2% YTD for end-May (although there was a MoM rise of 0.5%), we have lowered our 2016 UOB loan growth forecast to 0.5% (from 3%). Our 2017 loan growth forecast is also an unexciting 3.5% (from 4.5%).

Net interest margins (NIMs) should stay stable through 2016. 

  • Management guided for flattish NIMs for 2016. We forecast 2016 NIMs of 1.81% (1Q16: 1.78%). 
  • As UOB’s current account-savings account (CASA) accounts for 47% of total deposits, the firmer Singapore Interbank Offered Rate (SIBOR) (0.93% current 3-month SIBOR vs c.0.85% in 2Q15) should help to widen NIMs on a YoY perspective. 
  • However, expectations for a slower rise in the US federal funds rate going forward will keep NIMs relatively flat through 2016. We forecast for 2017 NIMs of 1.88%, driven by a SIBOR increase.

TP cut to factor in weaker conditions. 

  • We have thus lowered our 2016 and 2017 net profit forecasts by 6% and 11% respectively – our estimates are amongst the lowest in the market. 
  • Our GGM-derived TP is also cut to SGD18.85 (from SGD19.10), Key assumptions are 9.9% cost of equity and 9.9% ROE. Our TP gives a 2016F P/BV of 0.93x (5-year historical mean of 1.19x) and 10.5x P/E (5-year historical mean of 10.3x). Maintain NEUTRAL.
  • The risks include higher-than-expected impairment charges, weaker-than-expected NIMs and softer-than-expected non-interest income.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-05
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 18.85 Down 19.10