UOB - RHB Invest 2017-05-02: On Track For An Earnings Improvement

UNITED OVERSEAS BANK LTD U11.SI

UOB - On Track For An Earnings Improvement

UOB’s results are in line with our estimates, and reflect the stabilisation in its asset quality. However, we project a higher NPL ratio of 1.7% by end- 2017, on the back of a challenging economic environment.
Its 1.1% GP-to- loans ratio – higher than the peer average – provides scope for further write-backs.

The anticipated US Fed rate hikes would also bring NIM closer to our 2017 forecast of 1.76%.
Maintain BUY, with an unchanged TP of SGD23.90 (11% upside) pegged to a FY17F P/BV of 1.2x, which assumes a long-term ROE of 10.4%.

Whilst we view United Overseas Bank’s (UOB) sequentially unchanged NPL ratio as a positive, we believe the systemic economic challenges could lead to higher NPL ratios in the quarters ahead.

UOB’s 1Q17 overall credit cost of 32bps was unchanged from 4Q16’s level. Total allowances rose 43% QoQ to SGD186m, ie 26% of our FY17 provisions estimate. Its specific credit cost of 49bps was also down from 4Q16’s 76bps, which is a major positive. Its NPL ratio stayed the same, at 1.5%.
UOB was able to release general provisions due to its balance sheet strength. The provisions were no longer required on other assets relating to debt securities in 4Q16.
As at end-March, the bank’s general provisions-to-loans ratio stood at 1.1%, which still provides scope for writebacks in the future.

We expect 2017 NIM to widen to 1.76% (2016: 1.71%), along with the anticipated US Federal Reserve (US Fed) rate hike.
1Q17 NIM rose 4bps QoQ to 1.73% due to rising short-term interest rates, but narrowed 5bps YoY.

Together with wider NIMs, we expect NII to grow. Loans grew 1.5% QoQ in 1Q17, mainly driven by loans to the manufacturing sector climbing 8% QoQ (7% of total loans) – these are mainly trade-related lines given to the manufacturing sector.
Management said loans could have expanded faster if UOB had granted more loans at lower interest rates – the bank had rejected loans in 1Q due to low interest rates.

1Q17 net profit rose 5% YoY and 9% QoQ to SGD807m. It comprised 25% of our and consensus 2017 net profit forecasts of SGD3.26bn and SGD3.2bn respectively.
We introduce our FY19F earnings in this report and factor in a single-digit FY19 net profit expansion on the back of stronger revenue.

We maintain our GGM-derived TP of SGD23.90, which assumes a 9.1% cost of equity (CoE) and 10.4% ROE (2016 ROE: 10.2%). Our TP also implies 1.2x 2017F P/BV.

The downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-02

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 23.900 Same 23.900