United Overseas Bank (UOB SP) - UOB Kay Hian 2017-11-06: 3Q17 Pick-up In Net Interest Income And Fee Income Growth

UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - 3Q17 Pick-up In Net Interest Income And Fee Income Growth

UOB reported double-digit yoy growth in net interest income and fee income.
The sequential pick-up in net interest income and fee income growth was also substantial at 3.8% qoq and 6.6% qoq respectively.
Fully loaded CET-1 CAR improved 0.5ppt qoq to 13.8%.

United Overseas Bank (UOB) reported a net profit of S$883m for 3Q17, up 11.6% yoy, and was above consensus estimate of S$809m.

Net interest income increased 14.5% yoy, driven by:
1. NIM expansion of 4bp qoq to 1.79% primarily due by higher yield from investment securities by extending duration, and
2. robust loan growth of 3% qoq driven by Thailand (+3.9% qoq) and Greater China (+13.2% qoq).
The strong loan growth from Greater China was boosted by trade loans.
Fees grew 12% yoy with growth from wealth management (+40.2% yoy), fund management (+14.8% yoy) and credit cards (+10.8% yoy).
On a sequential basis, growth was driven by loan-related fees (+19.6% qoq) and wealth management (+5.2% qoq).

Cost-to-income ratio had fallen to 43.5% (2Q17: 45.6%) due to robust growth in total income of 9.7% yoy. Staff costs declined marginally by 0.7% qoq.

NPL balance increased 8.1% qoq. NPLs from the transport, storage and communications segment expanded by S$254m qoq due to a lumpy exposure to the oil & gas (O&G) sector. NPL ratio deteriorated 8bp qoq to 1.60%.
Total provisions increased 19.5% yoy and included write-backs in surplus general provisions of S$26m.

Fully loaded CET-1 CAR improved 0.5ppt qoq to 13.8%. Risk-weighted assets declined 1.5% qoq due to model changes to compute market risk for structural positions taken to hedge forex risk.

Management maintained its guidance of mid-single-digit loan growth, driven by corporate loans and intra-regional trade and investments for 2017.
Fee income is expected to expand in the mid- to high-single-digits, driven by wealth management, credit cards and fund management.
Cost-to-income ratio is expected at 46-47% while credit costs should hover at around 32bp.

UOB has outstanding loans of S$3.7b extended to the O&G sector, of which S$2.7b are deemed vulnerable (6-7 names). UOB has recognised most of these as NPLs, except one account to be recognised as an NPL in 4Q17. NPL formations from the O&G sector would peak in 4Q17 and the pressure on asset quality would ease thereafter.
Management has conservatively set aside sufficient provisions (heavily provided) for these vulnerable borrowers.

Bloomberg reported that UOB had entered into exclusive talks to sell its 13% stake in Hengfeng Bank (previously known as Evergrowing Bank) to Lucion Investment Holdings Group, an investment company backed by the Shandong provincial government.
Management did not comment on the potential deal as negotiations are on-going. The move does not represent a change in strategy and UOB remains committed to growing its Greater China franchise through its 100%-owned locally incorporated subsidiary United Overseas Bank (China).

UOB has general provisions of S$2.6b, above the expected credit loss requirements under FRS 109. Management has not decided on whether to:
1. utilise the excess general provisions for more specific provisions in 4Q17 to solidify its book prior to implementation of FRS 109 in Jan 18, or
2. transfer the excess general provisions to retained earnings, which would be a boost to BVPS. FRS 109 would create volatility in specific provisions.
Management would update investors on the impact of IFRS during the next results briefing.

UOB has announced that independent non-executive Chairman Hsieh Fu Hua would retire next year and would step down on 14 Feb 18. The board has nominated Wong Kan Seng to succeed Mr Hsieh.
Mr Wong was deputy prime minister of Singapore from 2005 to 2011. He joined the board on 27 Jul 17 and chairs the board’s strategy committee.
Chairman Emeritus Dr Wee Cho Yaw will also retire from the board at the next AGM in Apr 18 after six decades of service. He would be appointed honorary advisor to the board in recognition of his many years of leadership to the UOB Group.

NOT RATED
Target Price: N/A

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-06

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