United Overseas Bank - CIMB Research 2017-02-17: Relative outperformer

United Overseas Bank - CIMB Research 2017-02-17: Relative outperformer UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank - Relative outperformer

  • UOB's 4Q16 net profit of S$742m in line, thanks to a large writeback in general provisions (GP). FY16 net profit at 101% of our and Bloomberg consensus forecasts.
  • Fees had a good quarter despite seasonal challenges, as credit cards, wealth management (WM) and loan-related fees did well. NIM was stable qoq at 1.69%.
  • NPL ratio fell to 1.5% (3Q16: 1.6%) as recoveries and write-offs more than offset new NPA formation. Upstream oil & gas loans rose to S$5.3bn (3Q16: S$4bn).
  • Maintain Hold, with higher GGM-based target price of S$20.37 (1.02x CY17F P/BV) as we tweak our FY17-19F EPS to account for higher NII, fees and lower provisions.

Over-provision for GPs in prior years paid off 

  • 4Q16 net profit came in at S$742m (-6% qoq, -11% yoy), bringing full-year net profit to S$3,097m (-5% yoy). 
  • The relative outperformance vs. peers was mainly driven by a GP writeback of S$311m in 4Q16, while specific provisions (SP) similarly ballooned to S$428m (+49% qoq, +272% yoy) for oil & gas. 
  • Of the 76bp in SPs, 57bp (75%) were for existing NPLs from the 70-90% write-downs in collateral values. 
  • UOB’s over-provision of GPs in prior years paid off, with total coverage ratio still healthy at 116%.

NIM helped by higher non-loan yields; could pick up in 2H17F 

  • NIM held steady at 1.69% in 4Q despite lower customer loan spreads, as it continues to deploy excess liquidity into higher-yielding assets. 
  • UOB expects NIM to see a gradual pickup, though skewed towards 2H17 where it expects 2-3 US rate hikes. It has done well to keep funding costs stable via wholesale deposits, and has tapped its AA rating to diversify into new funding sources. 
  • It will focus on shoring up US$ deposits in Europe/North Asia. UOB guides for mid single-digit FY17 loan growth, driven by ASEAN.

Fees continue to outperform, but higher CIR remains a drag 

  • Fee income (+8% qoq, +11% yoy) held up well in 4Q amid a seasonally weak quarter. This was helped by strong credit card fees (+12% qoq, +15% yoy), wealth management fees (+8% qoq, +17% yoy) and loan-related fees (+8% qoq, -1% yoy). 
  • However, the gains were offset by higher operating expenses (+4% qoq, -1% yoy) as cost-income ratio (CIR) rose to 47.1% (3Q16: 45.0%). We think CIR could rise to 48% in the near term.

NPL ratio fell but underlying asset quality deteriorated 

  • 4Q NPL ratio was lower at 1.5% (3Q16: 1.6%) as higher recoveries in NPLs and writeoffs more than offset new NPA formation of S$387m (3Q16: S$780m). 
  • Upstream oil & gas NPL ratio was in mid-teens, with coverage ratio >50%. There was slight pickup in NPLs in manufacturing and ASEAN. 
  • UOB remains sanguine on its SME asset quality, with no signs of major uptick in delinquencies. It expects FY17 NPL ratio to stay at 1.5- 1.6% on slower new NPA formation, and credit costs to stay at 32bp.

Maintain Hold 

  • We see switching from DBS and OCBC to UOB given its relative outperformance, potentially bigger NIM uplift, highest coverage ratio, and confidence that its oil & gas collateral values have been sufficiently written down. That said, higher costs could weigh on profits. 
  • Our GGM-based TP rises to S$20.37 (1.02x CY17F P/BV) as we raise our FY17-19F EPS by 1-5% to account for higher NIM, fees and lower provisions. 
  • Upside/ downside risks to our Hold call are higher SIBOR/sharp deterioration in SME book.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-02-17
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 20.37 Up 18.420