United Overseas Bank (UOB SP) - UOB Kay Hian 2016-10-31: 3Q16 Plugging The Gaps In Exposure To The O&G Sector

United Overseas Bank (UOB SP) - UOB Kay Hian 2016-10-31: 3Q16 Plugging The Gaps In Exposure To The O&G Sector UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - 3Q16 Plugging The Gaps In Exposure To The O&G Sector

  • The increase in UOB’s NPL balance was significant at S$440m qoq, mainly on exposure to the O&G sector. 
  • Specific provisions were hefty at S$288m, or at 34bp, due to new NPLs and drop in valuation of collaterals. 
  • Having already classified the majority of vulnerable accounts as NPLs, management expects new NPLs to taper off and specific provisions to normalise to 30bp in 2017. 
  • Loan loss coverage was healthy at 111.4% while general provisions/gross loans was adequate at 1.4%, above the minimum requirement of 1%.


  • United Overseas Bank (UOB) reported a net profit of S$791m for 3Q16 (-7.8% yoy), above consensus estimate of S$736m.
  • Stability in NIM. Loans expanded 7% yoy and 2.4% qoq. The sequential expansion was driven by its operations in Thailand (+6.2% qoq) and Greater China (+7.2% qoq). NIM was stable at 1.69%. Cost of deposits improved by 3bp to 1.13%, which cushioned the negative impact from the correction in SIBOR and SOR. CASA ratio improved to 44.5% (3Q15: 42.1%).
  • Fees increased 1.6% yoy and 3.8% qoq with growth from fund management and loanrelated fees. Net trading income was robust at S$227m, up 39.4% yoy and 4.9% qoq.
  • Operating expenses increased by only 1.6% yoy, demonstrating UOB's tight control over discretionary expenditure. Cost/income ratio (CIR) was relatively unchanged at 45%.
  • Addressing the steep drop in valuation of collaterals. NPL ratio deteriorated by 0.17ppt to 1.61%. NPL balance increased by a hefty S$440m (Singapore: S$219m, Greater China: S$127m) or 14.4% qoq. The sequential increase was mainly from the Oil & Gas (O&G) sector. Specific provisions were at S$288m (new NPLs: 60%, drop in valuation of collaterals: 40%), but this was offset by a write-back in surplus general provisions of S$113m, which helped maintain total credit costs at 32bp. Loan loss coverage was a healthy 111.4%, above industry peers.
  • UOB’s fully-loaded CET-1 CAR remains healthy at 12.4%.


  • Cautiously optimistic for outlook in 2017. Management guided for loan growth of 5% for 2017, driven by growth from regional countries and the corporate/wholesale business.
  • Management expects SIBOR and SOR to have bottomed and NIM to stabilise going forward. There would be some positive impact on NIM should the Federal Reserve hike the US Fed funds target rate. 
  • Foresees revenue headwinds. Management expects operating expenses to increase by 5% in 2017. CIR could further deteriorate to 47-48% due to subdued growth in income coupled with on-going requirements to invest in its regional franchise and IT platform.
  • Vulnerable accounts already classified as NPLs. Management has identified marginal players in the O&G sector through its stress tests and has classified a majority of these vulnerable accounts as NPLs. Management expects new NPLs to normalise and taper off in subsequent quarters.
  • Management is concerned that there may be further drop in valuation of collaterals. As such, there could be further increase in specific provisions to 32-35bp in 4Q16.
  • Management expects specific provisions to normalise to 30bp thereafter in 2017.
  • According to management, the average LTV ratio for loans extended to the O&G sector is above 50%.
  • UOB continues to maintain a comfortable buffer with general provisions/gross loans at 1.4%, above the minimum requirement of 1%.
  • NPLs for housing loans increased by S$38m qoq. Management attributed the deterioration to the high-end residential property market in Singapore.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-31
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