UNITED OVERSEAS BANK LTD
U11.SI
UOB - More Net Interest Income Growth Ahead
- UOB’s 1Q17 net interest income QoQ growth of 2.1% outstripped that of peers, contributing to three quarters of outperformance.
- Going forward, UOB’s NIM should widen with the expected hike in US FFR, which would contribute to stronger net interest income.
- UOB also has robust balance sheet strength. Its loan loss coverage of 117% is higher than its two peers’ average of 102%, acting as a buffer, given asset quality uncertainties from a rising SIBOR and weak domestic economy.
- We maintain BUY, a higher TP of SGD25.95 (from SGD23.90, 11% upside).
UOB had outperformed in sequential loan growth for three consecutive quarters.
- UOB’s 1Q17 QoQ net interest income growth of 2.1% was higher than its two competitors’ average of 1.1%. This follows the preceding two quarters, whereby UOB had also outperformed its peers in sequential net interest income growth.
- In earlier briefings, UOB management had said that their strategy was not to expand loans at the expense of NIMs, and we believe this could be one reason for its outperformance.
NIMs seen to widen going forward.
- Both DBS and UOB recorded 1Q17 NIMs that were 3-4 bps wider QoQ. We forecast all three banks to record 2017 NIMs wider than their respective 1Q17 NIMs, on the back of further hikes in the Fed Funds Rate (FFR) driving SIBOR higher.
- For UOB, we are forecasting 2017 NIM of 1.76%, 3 bps higher than its 1Q17’s 1.73%.
Robust fee and commission income growth.
- On a YoY comparison, all three banks recorded robust 1Q17 fee and commission income growth. We see continued strength in the subsequent quarters.
UOB has the highest LLC.
- UOB’s 1Q17 loan loss coverage of 117% towers over its two peers’ average of 102%. In fact, UOB’s loan loss coverage has been the highest amongst peers over the past four quarters.
- Even though we saw stabilisation of NPL ratio (with all three banks recording unchanged sequential NPL ratio in 1Q17), the uncertainties persist, driven by impending higher SIBOR, and a relatively weak Singapore economy.
Maintain BUY.
- Given the stronger performance of UOB versus its peers, we project UOB could record stronger ROE in the coming few quarters. In this report, we raise UOB’s FY17-19 net profit forecasts by 2-3%.
- We raised our longer-term ROE forecast to 10.9% (from 10.4%). With an assumed CoE of 8.9%, we derive a GGM-derived TP of SGD25.95.
Risks.
- The downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs.
Interest income trends
UOB recorded the strongest 1Q17 sequential net interest income expansion.
- Amongst banking peers, the best performance for net interest income was UOB, which recorded the highest sequential net interest income growth over the past three quarters. We view this positively.
Expect widening NIM from 1Q17 levels.
- UOB’s 1Q17 NIM of 1.73%, which is much wider than OCBC’s 1.62%, but slightly lower than DBS’ 1.74%, shows sequential widening over the past three quarters starting from 2Q16. We view this positively.
- We forecast wider FY17 NIMs for all three banks versus their 1Q17 levels, on the back of the rising FFR. Despite the recent hikes in FFR not leading to similar rises in SIBOR, banks’ managements are generally of the view that further increases in the FFR (from now onwards) would translate to higher SIBOR. The argument is that the past hikes were to bring the spread of FFR over SIBOR back to historical norms, and with the spread now close to historical norms, further FFR hikes should translate to higher SIBOR. This should contribute to wider NIMs for the three banks going forward.
- Whilst OCBC recorded sequential loan growth higher than peers for the past two quarters, this did not translate to sequential net interest income growth rate that is higher than peers. This was because OCBC’s NIM was relatively squeezed as compared with peers. Even factoring in the 2bps squeeze in OCBC’s 1Q17 NIM from non-accruals, OCBC’s recurrent NIM is still narrower than peers, suggesting some trade-off between loan expansion and NIMs.
- OCBC has the lowest overall loan-to-deposit ratio, at 84.8%, about 3-4ppts lower than peers. However, for SGD deposits, the lowest LDR was recorded by DBS, at 80.7%, some 7-9ppts lower than its two peers. The relatively low LDR should provide the three Singapore banks scope to expand their loan book, and this could also help to widen their NIMs.
Fee and commission income
- The three banks recorded robust fee and commission income growth in 1Q17. On a YoY comparison, both DBS and UOB recorded mid-teens expansion.
- OCBC recorded a robust 28.6%, driven by wealth management (including the contributions from recently acquired Barclays Wealth & Investment Management) and investment banking fee income. We project further gains in fee and commission income going forward.
Balance sheet strength
- UOB has the highest loan loss coverage amongst its peers. This is despite UOB writing back its general provisions over the past few quarters. UOB’s high LLC offers UOB scope to further release its general provisions over the next few quarters.
- Another indication of UOB’s balance sheet strength is its high total provisions to loan ratio.
Leng Seng Choon CFA
RHB Invest
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http://www.rhbinvest.com.sg/
2017-05-24
RHB Invest
SGX Stock
Analyst Report
25.95
Up
23.900
