UNITED OVERSEAS BANK LTD
U11.SI
United Overseas Bank - 1Q17 Starting off on a strong foot
- 1Q17 net profit of S$807m was ahead of our forecast (S$765m) and Bloomberg consensus (S$757m), at 26%/25% of our/consensus FY17 forecast.
- The beat was from a record quarter in trading income (+55% qoq, +58% yoy), higher wealth management fees (+14% qoq, +55% yoy) and better NIM (+4bp qoq).
- Total credit costs was in line with guidance at 32bp, but 16bp GP writeback was still required to offset high SPs in Singapore and Malaysia for oil & gas related loans.
- Maintain Hold, with a higher GGM-based target price of S$21.20 (1.05x CY17F P/BV) as we tweak our EPS forecasts to reflect higher non-NII and lower costs.
Record trading quarter lifted earnings; WM also did well
- UOB’s 1Q17 net profit grew 9% qoq/5% yoy to S$807m, lifted by a record performance in trading income (+55% qoq, +58% yoy) to S$261m, which accounted for the bulk of the earnings beat.
- Management shared that 70-80% of trading was customer flow driven, helped by the addition of a new team in China, and should be sustainable; the rest was from opportunistic position taking.
- Wealth management (WM) fees were strong (+14% qoq, +55% yoy) as product sales returned with investors' increased risk appetite.
1Q NII boosted by loan volume and interbank margins
- NIM rose by a larger-than-expected 4bp qoq to 1.73%, boosted by higher customer loan, interbank and securities yields while funding cost remained stable. This drove a 2% qoq increase in net interest income (NII) to S$1,303m.
- Loans grew 1.5% qoq, largely driven by Greater China (+10% qoq, +22% yoy), manufacturing (+8% qoq, +3% yoy) and US dollar (+4% qoq, +33% yoy) loans.
- Deposits grew 1.7% qoq, leaving LDR largely unchanged at 86.7%.
- CASA ratio improved slightly to 44.9% (4Q16: 44.5%).
Impressive cost controls led to CIR falling to 45%
- UOB’s cost discipline was impressive, with operating expenses flat qoq despite an increase in headcount of 180, and investments in IT and its regional franchise. This brought cost-income ratio (CIR) to 45.1% (4Q16: 47.1%), below its initial guidance of 47- 48%.
- However, management is guiding for 15-20% growth in IT cost and higher occupancy cost in 2017.
- Malaysia/Indonesia CIR could rise to 40%/60% for the year.
Credit costs maintained at 32bp, though GP reversals required
- UOB kept total 1Q credit costs at 32bp, in line with its guidance. However, this was only achieved with a 16bp reversal in general provisions (GP), while specific provisions (SP) remained high at 49bp.
- Management guided that 1Q likely saw the last of chunky SPs for oil & gas, and SPs should come in below 32bp in 2017 on an annualised basis.
- GPs as a percentage of loans (net of SPs) fell to 1.1% (4Q16: 1.2%), but should pick up as more GPs are added.
- Allowance coverage ratio stayed high at 118%.
New NPA formation picked up slightly, though NPL ratio stable
- New NPA formation rose 10% qoq/23% yoy to S$424m, led by residual deterioration in oil & gas related loans. Management guided for a normalisation of new NPA formation ahead.
- NPL ratio was stable at 1.5%, though Singapore and Thailand saw a slight NPL pickup. Exposure to the upstream oil & gas sector fell to S$5.2bn (4Q16: S$6.2bn).
Maintain Hold
- UOB delivered decent ROE of 10% in 1Q17, but part of it was opportunistic.
- While NII should improve with upward NIM bias, cost pressures will show up ahead and concerns surrounding UOB’s large exposure to SMEs could limit share price upside; hence we maintain Hold.
- Our GGM-based TP rises to S$21.20 (1.05x CY17F P/BV) on EPS adjustments.
- Upside/downside risks could stem from higher NIM/worse asset quality.
Jessalynn CHEN
CIMB Research
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http://research.itradecimb.com/
2017-04-28
CIMB Research
SGX Stock
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