UOB - OCBC Investment 2016-10-28: Collateral Value Weakness

UOB - OCBC Investment 2016-10-28: Collateral Value Weakness UNITED OVERSEAS BANK LTD U11.SI

UOB - Collateral Value Weakness

  • Above expectations 3Q.
  • O&G collateral values at risk.
  • Cut FV to S$18.78.

3Q of S$791m versus consensus of S$771m 

  • UOB posted 3Q16 net earnings of S$791m, down 7.8% YoY and 1.2% QoQ, but this is above both market and our expectations with consensus estimates at S$771m. 
  • The main reason for the variance between ours and the actual results was the stronger-than-expected Net Trading Income, which rose 39.4% YoY and 4.9% QoQ to S$227m. 
  • Net Interest Income came in fairly flat at S$1230m, while Non-interest Income came off slightly to S$810m, giving Total Income of S$2040m. 
  • Net Interest Margin (NIM) improved marginally from 1.68% last quarter to 1.69% this quarter. 
  • Operating expenses fell 1% QoQ to S$918m. As expected, allowances rose this quarter, from S$161m in 2Q16 to S$185m this quarter. 
  • NPL ratio rose from 1.4% in 2Q16 to 1.6% this quarter.

Main focus on exposure to O&G; SME could feel pressure 

  • The main focus is on its exposure to the beleaguered Oil & Gas (O&G) sector, which was the key culprit for the increase in new NPL. Total exposure amounted to S$13.2b, of which loans accounted for S$9.2b or 4% of total loans. 
  • Specific allowances also spiked up, from S$121m in 2Q to S$288m in 3Q, bringing 9-month specific allowances to S$542m versus S$392m for FY15. The main reason cited was the decline in collateral value. 
  • As the bulk of these loans have been restructured, moving forward, the pace of new NPL formation should slow down. 
  • With the current slowdown and potentially higher rates ahead, this could also hurt the SME segment which accounted for 20% of its loans book. Management is guiding for NIM to stay flat, loans growth of about 5% and they will also be watching operating costs.

Cut FV from S$19.61 to S$18.78 

  • Taking into account the still challenging environment and the prospect of further weakness in collateral value, we have cut our earnings projections for FY16 and FY17. 
  • As a result, our fair value estimate drops from S$19.61 to S$18.78. We expect that for the near to medium term, there is a lack of share price drivers and we prefer to accumulate on price weakness. 
  • Maintain HOLD.

Carmen Lee OCBC Investment | http://www.ocbcresearch.com/ 2016-10-28
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 18.78 Down 19.610