United Overseas Bank (UOB SP) - UOB Kay Hian 2017-05-02: 1Q17 Catches Up In Growth

United Overseas Bank (UOB SP) - UOB Kay Hian 2017-05-02: 1Q17 Catches Up In Growth UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - 1Q17 Catches Up In Growth

  • UOB’s 1Q17 results beat consensus estimate. NIM rebounded by 4bp qoq while fee income registered double-digit growth. Net trading income was robust at S$261m.
  • Management expects NPL formation and specific provisions to ease in the coming quarters.


  • UOB reported net profit of S$807m for 1Q17 (+5.4% yoy), above consensus estimate of S$737m.

Rebound in NIM. 

  • Loans expanded 1.5% qoq and 9.4% yoy. The sequential expansion was due to trade finance for the manufacturing sector and housing loans. 
  • Yield for customer loans improved by 4bp qoq to 3.25% while cost of deposits eased slightly by 1bp qoq to 1.11%. Thus, NIM expanded 4bp qoq to 1.73% and net interest income grew 2.2% yoy.

Double-digit growth in fees. 

  • Fees grew 17.5% yoy with increased contributions from wealth management (+56.1% yoy) and fund management (+39.5% yoy), although credit cards (seasonal) and loans-related fees were softer on a sequential basis.

Robust contribution from treasury team. 

  • Net trading income was a robust S$261m.
  • According to management, 70-80% of trading income was derived from customers’ flows.

Asset quality has stabilised. 

  • NPL ratio was stable at 1.48%. The bank incurred specific provisions of S$277m (down 35.2% qoq) due to a deterioration in existing NPLs from the oil & gas sector. This was offset by write-back in general provisions of S$93m, which moderated overall credit cost to 32.7bp. Nevertheless, loan loss coverage was stable at 118.1%.


Guidance for 2017. 

  • Management guided mid-single-digit loan growth for 2017. NIM is expected to recover gradually. NPL ratio is expected to be stable at 1.5-1.6%.
  • Management maintained guidance that credit cost would remain unchanged at 32bp.

Specific provisions are expected to decline but general provisions should increase.

  • The worst is over for damage from the oil & gas sector. NPL formation peaked in 2Q16 and has gradually receded. Most chunky NPLs from the oil & gas sector have already been recognised by 1Q17. Management expect NPL formation and specific provisions to ease in the coming quarters.

Positive impact from higher interest rates. 

  • Hikes in US interest rates have a lagged positive impact on Singapore interest rates. However, the transmission has been slower recently due to excess liquidity. 
  • Management expects gradual improvement in NIM in the subsequent quarters assuming the anticipated two hikes in US interest rates materialise.

Capital management. 

  • UOB has a high CET-1 CAR of 12.8%, which will be utilised to support growth in business. The bank also needs a capital buffer to cope with upcoming changes from Basel 4. However, management is likely to review whether to reduce the discount for scrip dividend. 
  • Management intends to maintain CET-1 CAR at above 12%.

Malaysia: Anticipates higher expenses. 

  • Management sees some slowdown in Malaysia although asset quality held up well. Being cautious in customer and project selection enables the bank to weather the slower growth. Current low cost-to-income ratio of 35.8% is probably not sustainable as UOB continues to invest in technology.
  • Management will review its network of branches, which could provide room for cost reduction. Cost-to-income ratio could edge higher towards 40% over the longer term.

Thailand: Growth from mortgages. 

  • The infrastructure is in place and management currently focuses on team building. Loans expanded 3.4% qoq, boosted by residential mortgages in 1Q17. 
  • Management is confident of continued growth from Thailand.

Indonesia: NIM under pressure. 

  • Management will put in the infrastructure and invest in technology in Indonesia. It is focusing on rebuilding its franchise. NIM fell 26bp qoq to 4.08% due to competition from local banks. 
  • Management does not expect significant growth from Indonesia at this juncture.

Target Price: N/A

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-02
UOB Kay Hian SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998.000 Same 99998.000