UOB - RHB Invest 2017-11-06: Strength In Net Interest Income

UOB - RHB Invest 2017-11-06: Strength In Net Interest Income UNITED OVERSEAS BANK LTD U11.SI

UOB - Strength In Net Interest Income

  • UOB’s 3Q17 earnings were in line with expectations, with 9M17 net profit at 74% of our pre-results 2017 forecast. 
  • 3Q17 net interest income expanded 15% YoY, with the 10bps YoY widening in NIM a key contributor. The underlying growth trend remains evident from the 7.8% YoY growth in loans.  We lower our 2017 net profit forecast by 1%. 
  • UOB’s balance sheet strength remains a positive, given its 107% loan loss coverage, which is ~7ppts higher than peers. 
  • We lift our TP to SGD27.50 (from SGD26.50, 11% upside). Maintain BUY.



We forecast end-2018 NPL ratio of 1.6%. 

  • Whilst there could be further rises over the next 1-2 quarters (from 3Q17’s 1.6%), we have assumed that the ratio will fall back to 1.6% by end-2018. 
  • We view United Overseas Bank’s (UOB) relatively stable NPL ratio as a positive.


Oil & gas-related provisioning. 

  • UOB’s 3Q17 overall credit cost of 32bps was the same as 2Q17’s 32 bps. However, its specific credit cost of 37bps was higher than 2Q17’s 30bps. This was mainly due to a large account in the oil & gas sector.


NIM widening ahead. 

  • We expect 2017 NIM to widen to 1.77% (9M17: 1.76%), on the back of SIBOR rising from hikes in US Federal Funds rate (FFR), and UOB’s active duration management. 
  • 3Q17 NIM rose 4bps QoQ to 1.79% due to Singapore NIMs widening 6bps QoQ to 1.41%. Management guided that future NIMs should be marginally wider. We forecast 2018 NIM of 1.80%.


2017 loan growth forecast of 5%. 

  • Together with slightly wider NIMs, we expect 2017 NII to grow 10%. The general loan expansion trend is evident from the 7.8% YoY growth. We forecast 2018 loan growth of 5%.


Results in line. 

  • UOB's 3Q17 net profit rose 12% YoY and 5% QoQ to SGD883m. 9M17 net profit of SGD2.54bn accounted for 74% and 76% of our and consensus’ pre-results 2017 net profit forecasts respectively.


Maintain BUY. 

  • We raise our GGM-derived TP to SGD27.50, which assumes 8.5% cost of equity (CoE) and 10.7% ROE (9M17 ROE: 10.3%). Our TP also implies 1.27x 2018F P/BV, slightly higher than the 4-year historical average of 1.13x.
  • We believe the trend of rising interest rates would continue to propel Singapore banks’ share prices, and UOB stands to gain on account of its balance sheet strength.


Risks. 

  • Downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs.


UOB management indicated that its current general provision is above the requirement under IFRS 9. 

  • UOB is considering various options such as transferring the excess provisions into its P&L or moving it into reserves. UOB has yet to finalise its plans and will provide more colour at future dates.


The overall NIM expansion in 3Q17 was due to Singapore’s NIM widening - 

  • UOB raised the duration of government securities. Management sees scope for further increase in 10-year government bond yields and is positioning to take advantage. The bulk of its portfolio is in Singapore government SGS, and a much smaller amount in US government bonds.




Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-06
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 27.50 Up 26.500



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