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

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.

End-2017 NPL ratio likely to be at 1.6%, higher than 2Q17’s 1.5%. 

  • 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.

Provisioning expectations maintained. 

  • 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.

NIM widening in 2017. 

  • 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.

Maintain 2017 loan growth forecast of 4.5%. 

  • 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.

Results in line. 

  • 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.

Maintain BUY. 

  • 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