United Overseas Bank Limited - Phillip Securities 2016-08-01: Watch out for persistently low rates and competition

United Overseas Bank Limited - Phillip Securities 2016-08-01: Watch out for persistently low rates and competition UNITED OVERSEAS BANK LTD U11.SI 

United Overseas Bank Limited - Watch out for persistently low rates and competition

  • 2Q16 NPAT of S$801mn was up 5.1% yoy contributed by a 36.2% yoy increase in other non-interest income.
  • 2Q16 NIM decreased 9bps yoy to 1.68% (2Q15 NIM: 1.77%) and decreased 10bps qoq (1Q16 NIM: 1.78%).
  • 2Q16 NPL was higher yoy at 1.44% (2Q15: 1.24%) and higher qoq (1Q16: 1.36%).
  • Maintain to "NEUTRAL” with a lower target price of S$17.95 (previouslyS$18.15) pegged at unchanged 0.95x FY16F PBR (excluding preference shares).

Strong loans growth in 2Q16 despite weak economy. 

  • 2Q16 building and construction loans grew 20% yoy and housing loans grew 7.2% yoy. 
  • Management have alluded the strong growth in building and construction loans to infrastructure projects in Malaysia and businesses from global property funds active in the Asian region. 
  • Singapore Housing loans are a substantial component in UOB’s loans book accounting for approximately 15.2% of 2015 total gross loans (15.8% by 2Q16). However in the second half of 2016, we expect stiffer competition amongst banks for a bigger share of Singapore housing loans because Singapore housing loans are probably the single most coveted high quality asset for banks in today’s weak economy. 
  • We do not expect UOB’s housing loans growth to continue at the same pace as previous quarters.

NIMs greatly impacted by decline in SIBOR and SOR from 1Q16 to 2Q16. 

  • Comparing 2Q16 to 1Q16, UOB’s loans were priced lower but costs of funds remained elevated. This caused NIMs to compress drastically in 2Q16. 
  • Moving forward, Management highlighted that trimming high cost deposits is a priority but are also concerned about maintaining strong liquidity. 
  • We opined that NIMs compression could persist with intensified competition and exacerbates if rates continue to be low. 40% of Singapore loan books are priced in SIBOR or SOR, making UOB Singapore loans sensitive to SIBOR and SOR fluctuations.

NPLs rose 8bps qoq. 

  • New NPL formation was partly contributed by Singapore based companies in the oil and gas industry. By industry segment comparison, General Commerce NPLs indicated a sharp increase of 59% qoq to S$610mn. 
  • By geographic segment comparison, Singapore based NPLs indicated a sharp increase of 31% qoq to S$1.4bn. Allowance cover for 2Q16 is 125.6% (1Q15 allowance cover: 133.2%).

Investment Actions

  • Maintain "NEUTRAL” with a lower target price of S$17.95 (previously S$18.15). Our new target price is based on unchanged 0.95x FY16F book value (excluding preference shares). 
  • Weak demand for credit and stiffer competition for Singapore housing loans is expected to crimp loans growth in second half of 2016. 
  • We also see that UOB’s FY16F earnings will be greatly affected by low interest rates and competition for deposits.

Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2016-08-01
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 17.95 Down 18.15