UOB - DBS Research 2017-02-20: Positive turns ahead

UNITED OVERSEAS BANK LTD U11.SI

UOB - Positive turns ahead

Of its peers, UOB stood out with asset quality prospects appearing more optimistic.
Credit cost should normalise to 32bps in FY17. UOB remains the best buffered in terms of general provision reserves despite reversing a good chunk to offset higher specific provisions in FY16. New NPL formation should ease from here while NPL ratios are expected to hover around the 1.5-1.6% range in FY17.
Management stated that its SME exposures have been resilient and are diversified; SME loans are approximately 20% of total loans.
Management believes the Fed rate hike impact passthrough would lag SIBOR movements, hence expectations of a later rise in NIM; more apparent in 2H17.
Asset quality improvements should be the key catalyst for the stock when compared to its peers.
Management’s positive stance could provide a share price uplift in the near term.

4Q16 earnings were weaker due to lower trading and investment income.
Specific provisions were higher but overall provisions were offset largely by a general provision reversal. Full-year specific provisions came in at S$969m, where 40% of these came from collateral value deterioration from the oil & gas sector.
NPL ratio eased to 1.5% while loan loss coverage stood at 118%.
Loans grew strongly at 4% q-o-q, 9% y-o-y.
NIM was stable q-o-q but dipped y-o-y.

With NIM expected to rise but loan growth moderating to mid-single digits, top-line growth would still be decent.
Credit cost should normalise to 32bps; this is the key change in our forecasts as we had expected credit cost to rise to 35bps.
Management articulated that provisions have been set aside for most of its exposures. It still has S$2.7bn general provision reserves (general allowance reserve-to-total loans at 1.2%).
Cost-to-income ratio could rise to 45-47% as investments in IT and infra continue.

Upgrade to BUY, TP is raised to S$22.70 after our earnings upgrade of 5-8% over FY17-18F on lower credit cost and NIM traction. This implies 1.1x FY17F BV and is derived from the Gordon Growth Model (10.6% ROE, 3% growth, 9.7% cost of equity).
Asset quality improvements should be the key catalyst for the stock when compared to its peers.

Further risk to asset quality. An extended deterioration in the oil & gas sector, coupled with additional stress from construction sector and SME, could pose downside risk to earnings.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2017-02-20

DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 22.70 Up 21.800