UOB - DBS Research 2017-10-24: Ready For Lift Off

UOB - DBS Vickers 2017-10-24: Ready For Lift Off UNITED OVERSEAS BANK LTD U11.SI

UOB - Ready For Lift Off

  • Three critical factors to watch:
    1. property market recovery,
    2. NIM improvement,
    3. end to its asset quality woes.
  • 2H17 should be better; indications of NIM improvement and loan growth while asset quality issues should start to stabilise.
  • Credit cost should still stay at 32bps for FY17; possible revisit to lower levels post IFRS9 implementation. 
  • Upgrade to BUY, Target Price raised to S$26.90.



Ready for lift off; upgrade to BUY. 

  • UOB has lagged its peers YTD and more evidently post 2Q17 results. We believe it is time for its fortunes to turn based on three catalysts:
    1. The property market recovery bodes well for UOB as it is perceived to be a proxy for the bank's share price movement. UOB has the largest proportion of property-related loans vs peers; this should see loan growth improve as early as 3Q17.
    2. Imminent NIM improvement albeit backloaded; SIBOR/SOR finally edged up more visibly over the quarter which should see some repricing as early as 3Q17. The repricing effect typically takes approximately up to 90 days and as such, firmer NIM levels could be expected in 4Q17, spilling over to FY18.
    3. While asset quality concerns may still linger, the quantum of new NPLs has eased; the end to asset quality woes should warrant a re-rating, which we believe would be the case in FY18. 
  • Separately, with the implementation of IFRS9, banks may no longer be able to continuously build up general provisions; this could pose upside risk to UOB’s FY18-19F earnings from its sticky 32-bp credit cost guidance.


Where we differ. Heading towards the BUY zone. 

  • Our earnings remain marginally above consensus after our 2-4% FY18-19 earnings upgrade to factor in higher NIM and loan growth. 
  • We now have one of the few BUY ratings among consensus. Our TP is also at the higher end of consensus.


Potential catalyst: Expect a stronger set of 3Q17 earnings. 

  • We expect 3Q17 results to be stronger with a further improvement in NIM and more importantly, a pickup in loan growth due to the recovery of the property market. Corporate loan growth, particularly from property developers, is likely to drive loan growth for 3Q17. 
  • As there may be a few more blips on the asset quality side, albeit in a much smaller quantum vs a year ago, specific provisions may still stay relatively high. Cost-to-income ratio will likely ease as revenue growth picks up.


Valuation

  • Upgrade to BUY, Target Price raised to S$26.90. 
  • Our revised TP of S$26.90 is based on the Gordon Growth Model (11% ROE, 4% growth and 9.5% cost of equity), equivalent to 1.3x FY18 P/BV, almost at its 10- year average P/BV multiple.


Key Risks to Our View

  • Relapse in NIM and asset quality trends. A relapse in SIBOR movement could also pose risks to our NIM forecast. If NPL issues start to spread further from here, more specific provisions might be required.



WHAT’S NEW - The Beginning Of Better Things 


HIGHLIGHTS:


Uninspiring 2Q17 but... 

  • In a way, UOB’s 2Q17 results were not very inspiring with NIM only rising by 2bps (largely from its Singapore book), and loans contracting marginally while deposits were flat q-o-q. Its expenses were higher owing mainly to IT-related costs; cost-to-income ratio rose to a high of 46%. 
  • While specific provisions were lower, general provisions were pumped to continue building its general provisions reserves, keeping credit cost flat at an annualised 32bps.

…sounding more positive from 3Q17. 

  • However, we are expecting 3Q17 results to be stronger with a further improvement in NIM and more importantly, a pickup in loan growth, thanks to the recovery of the property market.
  • Corporate loan growth, particularly from property developers, is likely to drive loan growth for 3Q17. As there may be a few more blips on the asset quality side, albeit in a much smaller quantum vs a year ago, specific provisions may still stay relatively high. And UOB will keep setting aside general provisions where it can, which will keep annualised credit cost at 32bps for the year. 
  • Fee income should be decent, supported by continued strength in wealth management.
  • Meanwhile, with revenues likely to be strong, cost-to-income ratio may ease from the 46% level seen in 2Q17.


OUTLOOK:


Hopeful for a slight increase in NIM by end-FY17, more uplift in FY18. 

  • UOB’s Singapore operations saw a strong NIM uplift in 2Q17 mainly from active balance sheet management and effective deployment of its excess funds. While this may persist, NIM pressure from its regional operations could partially offset the uplift. 
  • UOB expects one more US Fed rate hike for the year and a possible sequential spillover to the Singapore interest rates. With SIBOR/SOR finally edging up more visibly over the quarter, there will be room for some repricing as early as 3Q17. Note that the repricing effect typically takes approximately up to 90 days, as such firmer NIM levels could be expected in 4Q17, spilling over to FY18.
  • Near term, UOB will likely show a quicker impact on NIM as it has a smaller Hong Kong-based operations which would drag NIM (the differential in the relative loan and deposit re-pricing from the 1-month and 3-month HIBOR movements experienced by its peers). Our FY18 NIM forecast is lifted and we now expect NIM to increase by 4bps to 1.79% in FY18.
  • Depending on the extent of Fed rate hikes and subsequent flow-through to SIBOR/SOR, the sustainability of NIM increase could pose further upside risk to our earnings forecast. However, should Fed rates not rise as many times as expected in FY18, the impact would be a more muted NIM traction towards 2H18 and FY19.

Property market boom to spur loan growth. 

  • The calibrated adjustments to the seller’s stamp duty (SSD) and total debt servicing ratio (TDSR) framework from 11 March 2017 were a symbolic move that has significantly turned the sentiment of the property market positively. The SSD was revised to holding periods of up to three years from four years, and the TDSR framework will no longer apply to mortgage equity withdrawal loans with loan-to-value (LTV) of 50% and below.
  • In recent months, we have seen the property market transactions improve significantly. Property developers have been looking to replenish their land banks, which has helped drive property-related loans. 
  • We also believe that new property sales will drive up mortgage growth more visibly when it reaches TOP (temporary occupation permit) in the coming two years.

Loan growth to pick up to mid-single digit by end-FY17. 

  • Loan growth has been anaemic, 2Q17 YTD at less than 1%. While we expect a pickup in loans as early as 3Q17, and flowing into 4Q17, loan growth in FY17 should end up close to 5%, in our view. 
  • We expect loans to improve to 6-7% FY18-19F, driven largely by property-related loans; the end-financing for new mortgages from strong property sales this year should start to trickle in the coming two years. 
  • In addition, loan growth is expected to be driven from its regional customer franchise proposition and cross-border investments from the corporate front.

Upside risk to earnings from lower provisions after IFRS9.

  • UOB has been keeping its credit cost at 32bps across the recent 5-year cycle. Where specific provisions were not necessary, general provisions were built up. However, when IFRS9 is implemented, banks may no longer be allowed to build such general provision buffers. As such, there could be upside risk to FY18-19 earnings.


Valuation & Recommendation: 


Upgrade to BUY; Target Price raised to S$26.90. 

  • Our earnings forecasts were above consensus previously but consensus earnings have caught up. Our current 2-4% earnings revision now brings our earnings forecasts just marginally above consensus after raising NIM and loan growth for FY18-19. 
  • Our revised TP of S$26.90 is based on the Gordon Growth Model (11% ROE, 4% growth and 9.5% cost of equity), equivalent to 1.3x FY18 P/BV, almost at its 10-year average P/BV multiple.




Sue Lin LIM DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-10-24
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 26.90 Up 24.800



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