United Overseas Bank (UOB SP) - UOB Kay Hian 2017-02-20: 4Q16 Signs Of Inflection Point In Credit Cycle

United Overseas Bank (UOB SP) - UOB Kay Hian 2017-02-20: 4Q16 Signs Of Inflection Point In Credit Cycle UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - 4Q16 Signs Of Inflection Point In Credit Cycle

  • UOB demonstrated pristine asset quality with NPL ratio receding 14bp qoq to 1.47% in 4Q16. However, the negative impact from hefty specific provisions of S$482m, aggravated by the drop in valuations of collaterals, was offset by the S$310m writeback in general provisions. 
  • UOB has the least exposure to the O&G sector currently at 4.9% of total loans, which allowed the bank to incur a lower credit cost of 23.7bp (79.6bp if we exclude write-back of general provisions) and maintain a healthy loan loss coverage of 118%.


  • United Overseas Bank (UOB) reported net profit of S$739m for 4Q16 (-6.2% yoy).

Loan growth from high-grade corporates and Singapore housing loans. 

  • Loans expanded 8.9% yoy and 3.9% qoq in 4Q16. From a geographical perspective, the sequential expansion was driven by Singapore and Indonesia. NIM was maintained at 1.69%.

Steady growth in fee income. 

  • Fees grew 10.6% yoy and 7.8% qoq with increased contribution from wealth management and credit cards. 
  • Net trading income moderated to S$168m due to seasonality. There were no gains from investment securities compared with the S$52m last year.

Cost-to-income ratio at 47.2%. 

  • Operating expense fell 0.7% yoy. Staff cost declined 1.6% yoy in 4Q16 with headcount trimmed by 172 or 0.7% in 2016. IT-related expenses increased 17.5% yoy as UOB invests in its technology infrastructure.
  • Associates incurred losses of S$21m in 4Q16 due to write-off of S$50m for investment in a private equity fund.

Addressing drop in valuations for collaterals. 

  • NPL ratio improved 0.14ppt qoq from 1.61% to 1.47%. UOB stepped up upgrades/recoveries to S$320m (3Q16: S$201m) and write-offs to S$219m (3Q16: S$111m). Provisions dropped 31% yoy to S$131m. Specific provisions were hefty at S$482m (new NPLs: 60%, drop in valuation of collaterals: 40%).
  • UOB wrote back general provisions of S$310m, which helped reduce total credit cost to 23.7bp (79.6bp if we exclude write-back of general provisions). Loan loss coverage remained healthy at 118.0%.

UOB declared a final dividend of 35 S cents/share, unchanged yoy. 

  • The scrip dividend scheme is applicable for the final dividend.


Guidance for 2017. 

  • Management guided mid-single-digit loan growth for 2017. NIM is expected to be stable with some positive bias. NPL ratio is expected to be stable at 1.5- 1.6%. Credit cost is expected to remain unchanged at 32bp.

Positive impact on NIM from extending duration. 

  • UOB has kept the duration of its available-for-sale investment book relatively short and holds mainly Singapore government bonds. 
  • Management sees a pick-up in inflation in many countries, which could signal an up-cycle in interest rates.  Management has decided to lengthen duration since mid-16. 
  • Yield from interbank and securities improved significantly in 2H16 (2Q16: 0.25%, 4Q16: 0.55%), which contributed to the stable NIM.

Addressing drop in valuations for collaterals. 

  • New NPLs have tapered off from S$802m in 2Q16 and S$780m in 3Q16 to just S$387m in 4Q16. Management believes the bulk of vulnerable accounts have already been recognised as NPLs. According to management, NPL ratio for the distressed offshore support services segment is midteens and these NPLs are more than 50% covered by provisions.
  • The huge specific provisions of S$428m in 4Q16 have factored in the drastic fall in valuations of collaterals by 70-80% (40% of specific provisions due to fall in valuations of collaterals). 
  • There could be more specific provisions going forward but management believes the residual amount to be taken due to the fall in valuations of collaterals is small.

Increased exposure to O&G sector. 

  • Total exposure to the O&G industry has increased by S$4.5b, or 34% qoq, to S$17.7b in 4Q16. 
  • The exposure to upstream industries increased by S$1.4b qoq to S$6.2b due to financing national oil companies in expansion and acquisitions. 
  • The exposure to downstream industries increased by S$3.1b qoq to S$11.5b due to trade finance for global O&G traders.

Target Price: N/A

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-20
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