United Overseas Bank (UOB SP) - Maybank Kim Eng 2016-10-30: More to come

United Overseas Bank (UOB SP) - Maybank Kim Eng 2016-10-30: More to come UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - More to come

Asset quality deterioration is not over 

  • 9M16 core PATMI of SGD2,357m (-3% YoY) was in-line. 
  • 3Q16 core PATMI of SGD791m decreased 7.8% YoY largely attributed to: 
    1. lower non-interest income as 3Q15 booked gains from sale of investment securities (-5% YoY); and 
    2. higher provisions (+16% YoY). 
  • 3Q results reflected softer topline growth from lower rates as NIMs declined by 8bps YoY, and asset quality deterioration mainly from the O&G sector. 
  • Group NPL ratio was 1.6% (2Q16: 1.4%) and provision coverage fell to 111.4% (2Q16: 124.7%).
  • We raise FY16-18E net profit by 1-5% mainly on higher non-interest income and lower costs, offset by higher provisions. Our TP is revised slightly to SGD18.36 based on ~0.9x FY17E P/BV. 
  • We prefer UOB (HOLD, TP SGD18.36) on its lower exposure to O&G sector and China.

Hit by O&G sector, but more to come 

  • New NPA formation of SGD780m (-3% QoQ) is largely from this sector. Specific provisions (SPs) in 3Q16 rose > 100% QoQ to SGD288m.
  • Management shared that 40% of SPs (i.e. SGD115m) are attributed to deterioration in collateral value for the O&G sector and SPs will remain high in 4Q16. We view this as a prudent move by management. 
  • The release in general provisions (GPs) of SGD113m in 3Q16 is to maintain total credit costs at 32bps. Despite that, UOB has the highest general provisions (GPs) buffer among peers at 1.4% vs peers’ 0.9-1.0%. 
  • As 20% of its book is attributed to SMEs, we expect to see some stress in this segment in view of lacklustre domestic/regional economic growth amid the turning credit cycle. With that, we raise provisions by 2-7% and credit costs to 36-43bps from 36-40bps for FY16-17E.

Lack signs of widening credit spreads 

  • Customer spreads narrowed to 2.13% in 3Q16 (2Q16: 2.23%, 3Q15: 2.27%), reflecting lower rates in the region and lack of signs of wider credit spreads in a heightened risk environment. 
  • We now expect lower NIM at 1.75-1.76% for FY16-17E (from 1.77-1.78%).

Maintain HOLD 

  • Maintain HOLD at TP SGD18.36 based on ~0.9x FY17E P/BV, close to 1SD below historical mean to reflect lower ROE forecasts. 
  • Risks to our call include: 
    1. higher interest income/NIM recovery; 
    2. lower provisions.

Swing Factors


  • Sharp and sustained rebound in commodity prices ease concerns about global risks.
  • Ability to reprice assets at higher interest rates, widening credit spreads.
  • Proactive restructuring of loans allows asset quality to hold up better than expected, with no major credit slippages.
  • Higher demand for domestic mortgages from easing of property-cooling measures.


  • Asset quality deterioration becomes a systemic problem especially if job losses in Singapore become pervasive and hurt the mortgage portfolio.
  • Shocks in the fixed income portfolio.
  • Lack of liquidity of a funding currency.
  • Succession issues.
  • Major changes in the banking competitive landscape in Singapore that result in the emergence of a dominant financial institution.
  • Translational losses from MYR/IDR depreciation.
  • Capital raising by any institution in sector.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-30
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 18.360 Up 18.340