United Overseas Bank - CIMB Research 2016-12-05: Largest SME exposure could be a drag

United Overseas Bank - CIMB Research 2016-12-05: Largest SME exposure could be a drag UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank - Largest SME exposure could be a drag

  • With a steeper yield curve, UOB could take on more duration risk and see NIM upside. However, non-NII growth could lag behind peers in the absence of M&As.
  • Though oil & gas worries could subside, UOB’s largest exposure to SMEs could be worrying amid a protracted economic downturn and rising unemployment.
  • Maintain Hold and GGM-based target price of S$18.42 (0.92x CY17F P/BV).

Decent NII growth from FI business, potential NIM upside 

  • UOB has built a decent franchise in the financial institutions (FI) business, with much of its loan growth achieved through funding the overseas investments of sovereign wealth funds and international property funds. We think UOB can achieve its target of mid single-digit loan growth in 2017 with further wins in the FI business.
  • UOB has also been more conservative than its peers in taking on duration risk and driving better interbank and securities yields. Given the recent rise in the long-end of the yield curve, we think UOB could be more comfortable in deploying assets in longer maturities, hence providing an uplift to NIMs.

Absence of M&As could make UOB pale in comparison to peers 

  • DBS and OCBC both have inorganic growth in wealth management fees in 2017 – DBS through its acquisition of ANZ and OCBC through the acquisition of Barclays. As a result, UOB could lag behind peers in non-NII growth as it would be difficult to compete organically.
  • That said, UOB is planning to launch several digital banking initiatives in 2017 that could help drive fees and customer acquisitions in the consumer and SME banking business, including credit card fees, service charges and deposit gathering.

A protracted downturn could hit UOB hardest

  • Similar to DBS, UOB has guided that the worst in the oil & gas credit cycle is likely over, as most of its vulnerable exposures have already been classified. However, we expect provisions to remain high as collateral values of offshore support vessels could continue to be written down.
  • Oil & gas aside, UOB has the largest exposure to the SME segment among the three banks, at 20% of loans. As SMEs tend to be the hardest hit during a recession, and recent surveys show that SMEs are finding it increasingly difficult to gain access to affordable financing, UOB’s asset quality could see further weakness in a protracted downturn.
  • UOB’s mortgage book is also most exposed to investment property and private property mortgages. It has started to see some stress in mortgage asset quality at the high-end segment where property prices have fallen the most. While mortgages are well collateralised and thus the loss given default is small, we would be watchful of a spike in unemployment, which is the biggest determinant of asset quality.

Maintain Hold

  • We maintain our Hold call and GGM-based target price of S$18.42 (0.92x CY17F P/BV).
  • As oil & gas worries subside and asset quality focus shifts to SMEs, we think UOB could come under pressure given its largest exposure to SMEs among peers.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 18.420 Same 18.420