United Overseas Bank (UOB SP) - Maybank Kim Eng 2017-08-22: A Solid Franchise; Upgrade To BUY

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UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - A Solid Franchise; U/G To BUY

Our preferred bank play; EPS est.’s and TP raised 

• We are positive on UOB’s ability to retain higher customer spreads as it is sensitive to re-pricing intervals and has pricing discipline. We also believe it is ahead of the provisioning cycle through pre-emptive classifications, making it relatively well-shielded from any further deterioration in the O&G sector. 
• We raised our FY17-19E net profit by 5- 11% due to changes in our assumptions for higher net interest income (+2-4%), higher non-interest income (+2-4%) and lower provision (0 to - 12.5%). 
• With the change in our EPS estimates, our assumed sustainable ROE is now 11.5% (10.4% previously), with COE of 10.1% and a growth rate of 3.5% (both unchanged). Our TP is raised 27% to SGD26.40, pegged to 1.2x FY18E P/BV (from 1.0x FY17E P/BV), after rolling forward valuations. 
• UOB is now our preferred pick.

‘Selective-lending’ strategy 

• We like UOB’s ‘selective-lending’ strategy as it remains disciplined in its pricing to ensure no significant margin compression from high-quality customers, whom tend to have lower lending rates due to lower credit risks. 
• Customer spreads in 2Q17 were maintained at 2.14%, higher than peers’ 1.96-2.03%. With a broadening economic recovery and rebound in Singapore’s property market, we expect loan growth momentum to be sustained. With that, we raised our FY17-19E loan growth forecast to 6- 9% YoY (from 6% previously).

Relatively well-shielded 

• We are comforted that the bank will look to build up its general provision (GP) buffer, should specific provisions (SP) on loans fall below 32bps. GP buffer is currently at 1.2%, ahead of peers’ 1.0-1.1%. It has the highest provision coverage at 113.2% vs peers’ 100-101%. 
• Although it has the lowest exposure to the O&G sector, specific provisions were 30bps of average gross loans in 2Q17 (vs peers’ 19-39bps). Ex-O&G portfolio, asset quality remained stable. 
• We do not expect to see a significant uptick in the NPL ratio, especially from its SME book, as rates start to normalise in a sanguine economic outlook.

U/G to BUY 

• We upgrade UOB to BUY as we like its disciplined pricing strategy, its sensitivity to re-pricing intervals, and as it has the lowest O&G exposure.
• UOB share price has risen 19% YTD, but lower than peers’ 22-28%. We believe these catalysts can lift share price going forward. 
• Risks to our call:
  1. lower revenues; and
  2. higher provisions.

Swing Factors

Upside

• Sharp and sustained rebound in commodity prices ease concerns about global risks.
• Ability to re-price assets at higher interest rates, widening credit spreads.
• Proactive restructuring of loans allows asset quality to hold up better than expected, with no major credit slippages.
• Higher demand for domestic mortgages from easing of property-cooling measures.

Downside

• Asset-quality deterioration becomes a systemic problem, especially if job losses in Singapore become pervasive and hurt the mortgage portfolio.
• Shocks in the fixed-income portfolio.
• Lack of liquidity of a funding currency.
• Succession issues.
• Major changes in the banking competitive landscape in Singapore that result in the emergence of a dominant financial institution.
• Translational losses from MYR/IDR depreciation.
• Capital raising by any institution in sector.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-08-22

Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 26.40 Up 20.800