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

UOB - DBS Vickers 2017-02-20: Positive turns ahead UNITED OVERSEAS BANK LTD U11.SI

UOB - Positive turns ahead

  • 4Q earnings in line, reversal in general provisions.
  • Worst could be over for asset quality.
  • FY17-18F earnings raised by 5-8% on lower credit cost and higher NIM.
  • Upgrade to BUY, TP raised to S$22.70.

Worst could be over for UOB, Upgrade to BUY. 

  • 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.

4Q/FY16 earnings in line. 

  • 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.

A better 2017. 

  • 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.

Key Risks to Our View

  • 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