UOB - RHB Invest 2017-07-31: Decent Earnings From NIM Expansion

UNITED OVERSEAS BANK LTD U11.SI

UOB - Decent Earnings From NIM Expansion

UOB’s 2Q17 earnings were in line with expectations, with 1H17 net profit at 50% of our pre-results FY17 forecast.
Net interest income expanded 12% YoY, with the 7bps YoY NIM widening as a key contributor. Although loans contracted marginally QoQ, the underlying growth trend remains evident from the 7% YoY growth in loans.
We raise our FY17 net profit forecast by 3%.

UOB’s balance sheet strength remains a positive, given its 113% loan loss coverage being > 10ppts higher than peers.
We lift our TP to SGD26.50 (from SGD25.95, 8% upside). Maintain BUY.

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

UOB’s 2Q17 overall credit cost of 32bps was the same as 1Q17’s. However, its specific credit cost of 30bps was sharply lower than 1Q17’s 49bps.
1H17 total allowances was SGD366m and represented 52% of our FY17 provisions estimate.

We expect 2017 NIM to widen to 1.76% (2016: 1.71%), on the back of the recent and expected hikes in US Federal Funds rate (FFR). 2Q17 NIM rose 2bps QoQ to 1.75% due to the Singapore NIMs widening 6bps QoQ to 1.35%.
Management guided that future NIMs could be flat to slightly wider than the 2Q17 level.

Together with slightly wider NIMs, we expect 2017 NII to grow 8%. Management explained that the 2Q17 QoQ loans contraction of 0.6% was due to the high 1Q17 base.
The general loan expansion trend is evident from the 7% YoY growth.

2Q17 net profit rose 5% YoY and 5% QoQ to SGD845m. 1H17 net profit of SGD1.65bn accounted for 50% of both ours and consensus pre- results 2017 net profit forecasts.

We raise our GGM-derived TP to SGD26.50, which assumes a 8.9% cost of equity (CoE) and 11% ROE (2016 ROE: 10.2%). Our TP also implies 1.31x 2017F P/BV, slightly higher than the 4-year historical average of 1.14x.
The potential total return for UOB shareholders is > 10% if we include the stock’s 3% dividend yield. We believe the trend of rising interest rates will continue to propel SG bank share prices, and UOB stands to gain on account of its balance sheet strength.

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/ 2017-07-31

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 26.50 Up 25.950