United Overseas Bank - CIMB Research 2017-04-28: 1Q17 Starting Off On A Strong Foot

United Overseas Bank - CIMB Research 2017-04-28: 1Q17 Starting off on a strong foot 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 | http://research.itradecimb.com/ 2017-04-28
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 21.20 Up 20.370