United Overseas Bank - CIMB Research 2016-10-28: Tapping into GP reserves, but adequate coverage

United Overseas Bank - CIMB Research 2016-10-28: Tapping into GP reserves, but adequate coverage UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank - Tapping into GP reserves, but adequate coverage

  • 3Q16 net profit of S$791m was in line with our expectations (S$782m) and consensus (S$771m). 9M formed 77%/78% of our/consensus FY16F forecasts.
  • NII grew 2% qoq as NIM expanded 1bp on lower funding cost. Non-NII was flat qoq as higher fees (+4% qoq) were offset by lower seasonality in dividend income.
  • The NPL ratio rose to 1.6% (2Q: 1.4%) due to higher oil & gas NPLs.
  • Maintain Hold, with a lower GGM-based target price of S$18.42 (0.92x CY17 P/BV).

NII lifted by NIM expansion; impressive loan growth to stay 

  • NII rose 2% qoq with the help of 1bp NIM expansion. While the lower SIBOR/SOR compressed loan spreads, lower funding costs and redeployment of excess funds on the interbank led to better margins. 
  • Loans grew 2% qoq, driven by loans to Financial Institutions (FIs) (+25% qoq) in Greater China and Australia. 
  • UOB has gained a strong foothold in the FI business, financing property and sovereign wealth funds’ investments.
  • We think continued growth in FI will back UOB’s expectation of 5% loan growth in 2017.

Non-NII held steady on robust fee engine 

  • Non-NII was flat qoq on higher fee income (+4% qoq), offset by seasonally-lower dividend income. Fund management (+24% qoq) and loan-related fees (+9% qoq) were the key out-performers, while credit card fees (+3% qoq) continued to see steady growth.
  • We expect loan-related fees to hold up well alongside loan growth from the FI business.

Poorer asset quality on oil & gas, but new NPA formation to slow 

  • NPL ratio rose to 1.6% (2Q: 1.4%) on recognition of more oil & gas NPLs. 
  • New NPA formation of S$780m still elevated (2Q: S$802m), mostly oil & gas. 
  • Management guides for new NPA formation reverting to S$400m-500m in 4Q as most vulnerable oil & gas loans have been classified. 
  • Mortgage NPLs inched up for high-end properties but the masses holding up well. Average LTV for mortgage portfolio remains low at 60%. 
  • We would watch for weakness in SME (20% of loans) if the economic weakness persists.

Glaring write-back of GP seems reasonable if one-off 

  • We were initially concerned about the huge GP write-back (-21bp) to offset the 54bp SP charge, but management explained it has built a comfortable GP buffer (GP/loans at 1.4% vs. 1% MAS min), and thinks the oil & gas NPL cycle is nearing the end. 
  • We view the write-back of GP as reasonable if it is one-off, and provision coverage ratio of 112% (2Q: 125%) stays above peers’ 40% of SPs (S$115m) in 3Q was due to lower collateral value of offshore vessels; more SPs set for 4Q on further write-down of collateral values.

Credit cost guidance remains at 32bp; CIR could rise to 47-48% 

  • Management guided for 32bp credit costs to remain sufficient in FY17, but we take a more conservative stance and assume 38bp in FY17-18F. 
  • It also guided for cost-income ratio (CIR) to rise to 47-48% in the near term on further investments into digital banking amid a weak revenue environment. 
  • Cost growth is expected to trend around 5%.

Maintain Hold 

  • We tweak our FY16-18F EPS and our GGM-based target price falls to S$18.42 (0.92x CY17 P/BV) as we roll forward to CY17F. 
  • While we expect 4Q16F net profit to be weak, similar to peers, we think UOB has built a decent franchise to weather the slower economic growth in 2017. 
  • Its credible FI franchise and opportunity to enhance asset yields by taking on more duration risk gives it flexibility to boost topline. 
  • Upside/downside risk could come from faster NPL recoveries/worse asset quality if unemployment spikes.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-10-28
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 18.420 Down 18.520