United Overseas Bank - CIMB Research 2018-02-14: 4Q17 Showing Some Love For This Relative Laggard

United Overseas Bank - CIMB Research 2018-02-14: 4Q17 Showing Some Love For This Relative Laggard UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank - 4Q17 Showing Some Love For This Relative Laggard

  • UOB's FY17 net profit of S$3,390m (+9% y-o-y) was in line with consensus and our expectation, at 103% of our full-year forecast. 4Q17 net profit of S$855m was at 26%.
  • As expected, UOB took advantage of the upcoming FRS 109 and cleaned up its O&G loan book. We do not expect further charges for O&G.
  • Fully-loaded CET1 CAR improved to 14.7%. With strong capital buffers, a final DPS of S$0.45 and special DPS of S$0.20 were declared, bringing full-year DPS to S$1.0.
  • We forecast an FY18F DPS of 90Sct; we view scope for higher dividends.
  • We upgrade UOB from Hold to ADD as it is a relative laggard. Downside risks could come from a slowdown in ASEAN (ex-Singapore) markets.



4Q17 results highlights: spring cleaning + higher dividends 

  • UOB registered a 4Q17 net profit of S$855m (+16% y-o-y), due to higher NII, fee and trading income. As expected, the bank took advantage of the upcoming FRS 109 and cleaned up its O&G loan book. Owing to RWA optimisation, fully loaded CET1 CAR improved significantly to 14.7% (3Q17: 13.8%). 
  • A final DPS of S$0.45 and special DPS of S$0.20 were declared, bringing its total DPS to S$1.0 (+43% y-o-y, payout: 49%). 
  • The group achieved ROE of 9.4% for the quarter and 10.2% for FY17 (FY16: 10.2%).


NII up on higher loans and NIM 

  • NII rose 15% y-o-y on higher loans (+5% y-o-y/+1% q-o-q) and NIM (+2bp q-o-q/+12bp y-o-y to 1.81%). NIM averaged 1.77% for FY17 vs. 1.71% for FY16. We see some scope for the bank to further deploy excess liquidity, and project NIM to average 1.82% in FY18F. 
  • We forecast loan growth of 7% for FY18F; with growth expected to stem from Singapore, Thailand and Greater China. 
  • FY17 also saw increased activities in financial institution lending as the bank focused on sectors with fee income and connectivity flow potential.


Higher non-NII on fees and trading; prospective change in CIR 

  • Non-NII grew 12% y-o-y, driven by WM (+29%), fund management (+28%) and trading income (+11%). We forecast non-NII growth of 5.4% for FY18F (FY17: +8.2%). Opex grew 15% y-o-y with CIR at 47.8% (4Q16: 47.2%). 
  • FY17 CIR was 45.5% vs. 45.9% for FY16. We note that going forward, UOB would adopt netting of fee expenses treatment (similar to peers, DBS and OCBC). When applied retrospectively, FY17 CIR would be 43.7% (instead of 45.5%); FY17 fee/total income would be 21.9% instead of 24.4%.


Accelerated recognition of its “vulnerable” O&G book 

  • The group recognised S$0.8bn in SP (125bp of ave. loans), which was partially offset by S$0.6bn release of excess GP (total credit costs at 17bp of ave. loans). As a result, upstream O&G exposure decreased to S$3.8bn (3Q17: S$4.3bn), with collateral values cumulatively written to c.10% of pre-crisis valuations. 
  • New NPAs spiked up to S$1.2bn; NPL ratio increased to 1.8% (3Q17: 1.6%). NPL coverage reduced to 91% (3Q17: 108%). We forecast FY18F total credit costs at 25bp (vs. through-the cycle of 32bp).


Scope for higher dividends 

  • On the balance sheet, customer deposits increased 7% y-o-y/2% q-o-q with LDR at 85.1% (FY16: 86.8%). Due to a 7% y-o-y drop in RWA and higher retained earnings, fully loaded CET1 CAR improved to 14.7% (FY16: 12.1%; highest capital buffer among the three banks). 
  • Management said that it is comfortable with CAR at 12.5%; we view that it is taking a moderated approach to higher payouts. Annualising 2H17 core DPS, we forecast a 90Scts DPS for FY18F (39% payout), and see scope for higher dividends.


Upgrade to ADD with a higher GGM-based Target Price 

  • Higher NII, fees and benign credit costs are tailwinds for all three Singapore banks; UOB is no exception. 
  • We raise our FY18F-19F EPS by 4.1-5.4% on higher fees and lower credit costs. Since 2017, UOB has lagged peers; we now see a decent entry level for the stock (6.7% upside +3.4% FY18F yield). 
  • We upgrade UOB from Hold to ADD with a higher GGM-based Target Price of S$28.0 (implied 1.3x FY18F P/BV vs. FY19F ROE of 10.8%; 11.3x FY19F P/E – in line with mean).







YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-02-14
CIMB Research SGX Stock Analyst Report BUY Upgrade HOLD 28.00 Up 25.400



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