UOB - DBS Research 2016-12-07: Benefitting from higher rates; but still lacks a non-interest income angle

UNITED OVERSEAS BANK LTD U11.SI

UOB - Benefitting from higher rates; but still lacks a non-interest income angle

Maintain HOLD; TP raised to S$21.80; earnings raised by 10% on higher NIM.
Loan growth to taper off to low single digits in FY17.
Asset quality issues to ease off; credit cost still guided at 32bps.
Still lacks a non-interest income catalyst; more reliant on loan-related business.

Expectations on rising interest rates from December 2016 should start to spell a new phase for higher NIM.
Our FY17-18F earnings are raised by 10% per year on higher NIM expectation bearing in mind loan growth will likely stay sluggish and funding costs stay stable.
We expect credit costs to decline in FY17F as the bulk of NPL issues have been addressed. UOB remains the most well buffered in terms of general provision reserves buffer.

We expect NIM to rise by 9bps in FY17F and stabilise going into FY18F. This will be the key driver to top line amid another expected sluggish year for loan growth.
Our sensitivity analysis indicates that for every additional 25-bp increase in SIBOR, UOB’s NIM will rise by 6bps, holding other variables constant, and this would lead to a further 5% uplift to earnings. Note that UOB’s S$ CASA-to-total deposits are at 44% (OCBC: 50%).
UOB still lacks a strong non-interest income catalyst in our view. It has also been lying low when it comes to acquisitions of wealth management businesses compared to peers.
UOB’s non-interest income is more skewed towards credit-related business, which in our view would see growth a tad lower vs peers which have higher growth from their wealth management businesses.

There is more than sufficient excess general allowances as a buffer to manage its credit costs with general allowance reserve-to-total loans at 1.4%, highest among peers, even after utilising part of it to offset specific provisions in 3Q16. SME loans would be closely watched; SME loans are approximately 20% of total loans.
Specific provision levels should normalise in 2017 but overall credit cost should stay at 32bps.

TP is raised to S$21.80 after our earnings upgrade of 10% over FY17-18F on higher NIM assumptions. This implies 1.1x FY17F BV and is derived from the Gordon Growth Model (10.3% ROE, 3% growth, 9.7% cost of equity).
A new catalyst has emerged – rising rates bode well for NIM.

Further risk to asset quality. NPL formation may still stay high for another quarter before normalising. A prolonged deterioration in the oil & gas sector, coupled with additional stress from SME, could pose downside risk to earnings.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2016-12-07

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 21.80 Up 18.100