UOB - DBS Research 2017-05-02: Springing Off The Blocks

UOB - DBS Vickers 2017-05-02: Springing Off The Blocks UNITED OVERSEAS BANK LTD U11.SI

UOB - Springing Off The Blocks

  • 1Q17 earnings beat consensus forecasts; in line with ours; driven strongly by non-interest income.
  • Provisions were still high for the quarter; specific provisions were offset by general provision release. 
  • Worst of NPL issues should be over; new NPLs should taper off from here.
  • Maintain BUY with S$22.70 TP; provides 10% upside including dividend yield.

What’s New 

Strong 1Q17 momentum to start the year. 

  • 1Q17 earnings came in at S$807m (+9.3% q-o-q; +5.4% y-o-y) driven by overall strong revenues, well-managed costs, offset by higher provisions. 
  • Expenses were flat q-o-q but rose 7% y-o-y largely from IT-related and revenue-related business costs with cost-to-income ratio of 45%. 
  • Tax rate was higher for the quarter due to its tax position in its Indonesian operations.

Higher NIM q-o-q and strong loan growth. 

  • Net interest income was driven by improved NIM (+4bps q-o-q) coupled with decent loan growth (+1.5% q-o-q). The q-o-q NIM increase was partially due to loan re-pricing from rising short-term rates as well as improved yields from its securities portfolio as the bank gradually extended its portfolio duration. 
  • Funding cost was relatively stable q-o-q. 
  • On a y-o-y basis, loans grew 9.5% driven mainly by manufacturing and financial institutions, and investment & holding companies.
  • Deposit growth was CASA-driven and mainly Singapore driven.
  • Overall loan-to-deposit ratio stood at 87%, flat from the previous quarter.

Record wealth management and fund management income.

  • Non-interest income rose by a strong 9% q-o-q; 18% y-o-y with record income levels for wealth management and fund management. This was driven by the improved investment environment across asset classes and better momentum from its Privilege Reserve segment as well as private banking.

General provisions at work to offset specific provisions for the quarter. 

  • Provisions were significantly lower q-o-q albeit still higher y-o-y. Specific provisions booked for the quarter decreased q-o-q but were still largely related to the oil & gas sector and shipping industries. There was a continued release of general provisions to offset the sharp rise in specific provisions, hence overall credit cost was kept at 32bps. 
  • Otherwise, annualised credit cost solely for specific provisions was at 49bps. The ratio of general provision reserves-to-gross loans stood at 1.1%.

Asset quality stayed stable. 

  • NPL ratio stayed at 1.5% but more importantly, new NPLs were relatively stable with new NPLs mainly from the general commerce and oil & gas industries. The peak of its NPL formation was in 3Q16. Its oil & gas exposure remained at 5% of total loans. 
  • Upgrades, recoveries and translations were slightly lower for the quarter. Absolute NPLs were relatively stable q-o-q. Loan loss coverage remained high at 118%.

Capital levels elevated. 

  • UOB’s fully loaded CET1, Tier-1 and Total CAR stood at 12.8%, 13.8% and 17.3% respectively.
  • Capital ratios improved, largely driven by lower riskweighted assets q-o-q. No dividends were declared during the quarter.

Regional operations doing well except Indonesia. 

  • UOB’s second largest profit contributor by geography is Malaysia. Its Malaysian operations delivered a stellar performance for the quarter strong revenues and well-contained costs (costto-income of 35%), while provisions were significantly lower. 
  • Its Thai operations showed decent improvement y-oy, albeit on a small base, but costs remained high. 
  • Greater China operations were strong and it saw a significant rise in non-interest income which was largely trade-related (customer flows). 
  • UOB Indonesia is still in the midst of restructuring and is now the smallest contributor among its regional operations; NIM remains depressed while costs stayed high.


Worst of NPL issues should be over. 

  • The key message over the analyst conference call was – the worst of NPLs should be over. As mentioned above, the peak of new NPL formation was in 3Q16. 1Q17 should be the last quarter with chunky NPL classification. New NPLs should taper off from here and new ones would be business-as-usual NPL incidences. 
  • Overall credit cost is still guided at 32bps. Should specific provisions credit cost fall below 32bps, general provisions will be set aside. 
  • Over time, the bank should rebuild its general provision reserve buffer above 1.1%.

Sustained revenue traction ahead. 

  • Sequential improvement in NIM will be likely but the extent of increase will depend on the speed of the Fed rate hikes and the liquidity situation in Singapore as this would be the drivers to SIBOR movements. 
  • The strong momentum from its wealth management and fund management business is expected to continue to pick up in coming quarters.

Higher expenses. 

  • As guided during the FY16 results briefing, there will be more investments poured towards investments particularly in IT and regulatory-related costs. There could be a hold-back on staff cost increases. 
  • Cost-to-income ratio is guided at 45-47%.

Capital management. 

  • Management had guided it would be comfortable with CET1 levels above 12.5% on a longer-term basis. The scrip dividends will continue but the extent on the discount for the new share issued for the scrip dividend will be deliberated depending on the amount of capital the bank intends to keep. 
  • Note that dividends are only paid in 2Q and 4Q. 
  • The bank remains on a lookout for M&A if they fit its strategy.

Valuation and recommendation 

  • Maintain BUY with S$22.70 TP. 
  • Our TP 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. Management’s positive stance should bode well with potential share price uplift in the near term. These have supported the share price well YTD. 
  • Together with a dividend yield of almost 4%, total return for the stock is at 10% based on the last closing price.

Sue Lin LIM DBS Vickers | http://www.dbsvickers.com/ 2017-05-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 22.700 Same 22.700