United Overseas Bank (UOB SP) - Maybank Kim Eng 2017-11-03: Steady And Consistent

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UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - Steady And Consistent

3Q17 in-line; EPS and TP raised 

• United Overseas Bank (UOB)'s 3Q17 core PATMI of SGD883m (+5% QoQ, +12% YoY) was in-line with our expectations, but beat Bloomberg consensus estimates by 5%. 9M17 core PATMI of SGD2.5b (+8% YoY) met 70% of our FY17 forecast. 
• We leave our forecasts for FY17E largely unchanged, but raised FY18-19E core net profit slightly by ~2-3%. 
• With the change in EPS forecasts, our assumed sustainable ROE is now 11.7% (11.5% previously), COE 10.1%, and growth rate 3.5% (both unchanged). Accordingly, our TP is raised 3% to SGD27.10, pegged to 1.2x FY18E P/BV, slightly below its 10-year mean of 1.3x to reflect lower forecast ROEs compared to previous periods.

Growth strategy intact 

• Despite competitive pressures, 3Q17 customer spreads were higher by +1bp QoQ/+2bp YoY at 2.15% (2Q17: 2.14%). UOB’s ‘selective lending’ strategy and pricing discipline continue to reflect its ability to price up lending yields amidst the chase after high-quality credit. 
• Its sensitivity to SGD interest rates, coupled with more lending opportunities, are positive catalysts. We expect modest NIM upside of 2-5bps across FY17-19E.

Expect one big O&G name to come through in 4Q 

• Out of SGD3.7b loan exposure to the risky upstream segment, management highlighted that over SGD1b were attributed to 6-7 names.
• The vulnerable accounts amongst the 6-7 names have already been classified as NPLs and provided for, except for one big name, and provisions will come through in 4Q17. With that, we raise our FY17E provisions by ~4%, but reduce FY18-19E provisions by 2-5% as most chunky O&G exposures should have been provided for. 
• Our FY17-19E credit cost is now 25-34bps (from 27-33bps).

Maintain BUY 

• We continue to like UOB’s disciplined pricing strategy, sensitivity to repricing intervals, and lowest exposure in the O&G sector. Risks to our call:
  1. lower revenues and
  2. higher provisions.

Revisions to Estimates 

• We leave our forecasts for FY17E largely unchanged, but raised FY18-19E core net profit slightly by 1-3% mainly on:
  1. higher loan growth of ~8% (from ~6%) as we expect loan growth momentum to be sustained from economic recovery;
  2. lowered provisions by 2-5% as the chunky exposures to O&G support services sector should have been provided for. 
• Our FY17-19E credit costs are now 25- 34bps (from 27-33bps).
• While general provisions (GP) of SGD2.6b as at 3Q17 is well above the requirements for upcoming IFRS 9 rules, management is unable to provide more color at this stage as they are still reviewing various options. One such option includes providing more SP in 4Q (especially for the troubled O&G support services sector) by utilising the excess GP it has built. Our current forecasts have not factored in IFRS 9.

3Q17 results snapshot 

• 3Q17 core PATMI of SGD883m (+4.5% QoQ, +11.6% YoY) was in line with our expectations, but ahead of Bloomberg consensus’ expectations of SGD842m by 5%. 9M17 core PATMI of SGD2.5b (+7.6% YoY) met 70% of our previous FY17E forecast. Higher PATMI was attributed to:
  1. higher net interest income (+3.8% QoQ, +14.5% YoY) driven by decent loan growth (+3% QoQ, +8% YoY) and higher NIM of 1.79% (+4bps QoQ, +10bps YoY);
  2. slightly higher non-interest income (+0% QoQ, +2.5% YoY) supported by wealth management and loan-related fee income. 
• This was offset by higher provisions (+23% QoQ, +19.5% YoY) driven by specific provisions from O&G support services sector.

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/ 2017-11-03

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 27.10 Up 26.400