UOB (UOB SP) - DBS Research 2018-02-15: Strong Income Offset By Provisions; Dividends Surprised

UOB (UOB SP) - DBS Vickers 2018-02-15: Strong Income Offset By Provisions; Dividends Surprised UNITED OVERSEAS BANK LTD U11.SI

UOB (UOB SP) - Strong Income Offset By Provisions; Dividends Surprised

  • Strong income delivered but offset by higher provisions.
  • Dividends surprised; likely a new normal for UOB.
  • Worst of asset quality issues with oil & gas over; ride on better loan growth and NIM.
  • Maintain BUY, Target Price at S$29.50.

What’s New 

FY17 net profit was 9% higher at S$3.4bn; in line with consensus and our estimates. 

  • UOB’s FY17 net profit came in at S$3.4bn (+9% y-o-y). Earnings were driven by strong overall income from fees (wealth management, fund management and investment gains) as well as higher NIM (+2bps q-o-q, +6bps y-o-y). Loan growth ended the year at 5%. 
  • Despite higher income, net profit for the quarter was offset by higher provisions from the oil & gas segment. New NPLs hit a high of almost S$1.2bn (full year at S$2.9bn).

Higher provisions and NPL expected. 

  • Specific provisions of S$781m were higher q-o-q and y-o-y, but offset by a reversal in general provisions of S$641m. UOB articulated that the reversal of excess general allowance in 4Q17 was taken after factoring in the requirement under IFRS9/SFRS109 which took effect from 1 January 2018 as they only require a general allowance of c.$2bn. 
  • New NPLs shot up to S$1,167m (4Q17: S$799m, 4Q16: S$387m), mainly in relation to the oil & gas sector, with NPL ratio ticking up to 1.8%. UOB has further written down the collateral values to 10% of its original collateral value. As of 31 December 2017, UOB’s oil & gas exposure stood at 5% of total loans. Loan loss coverage stood at 91%.

Strong capital levels. 

  • Capital levels are now the strongest among peers with CET1 ratio at 14.7% and total CAR at 18.7%. UOB saw a c.3% reduction in its risk-weighted assets (RWA), as it completes the major items of its RWA optimisation exercise, largely due to recalibration of its foreign exchange risk.

Dividends a surprise. 

  • Dividends surprised with final DPS of 45 Scts (FY16 final DPS: 35 Scts) plus a special DPS of 20 Scts (FY16 special DPS: 20 Scts) bringing full-year total DPS to S$1.00 (including special DPS). 
  • Scrip dividend still applies, though at zero discount.

Regional operations' performance was mixed. 

  • For the full year, Greater China saw the highest growth at 40% y-o-y on PBT due to strong fee and commission as well as other non-interest income. 
  • Thailand and Malaysia posted a 13% and 10% growth in PBT respectively, largely on the back of improved income, while Indonesia’s performance continues to be weak due to high provisions. 
  • Malaysia remains the second largest profit contributor after Singapore.


Improved loan growth going forward. 

  • Having ended FY17 with a 5% loan growth, UOB continues to be optimistic about FY18’s outlook and has guided for high single-digit loan growth. UOB remains optimistic about Thailand and Greater China, as domestic loan growth continues to grow.

Opportunities abound in the region. 

  • Specifically, UOB highlighted two key priorities:
    1. boost fee income, and
    2. tap connectivity flow. 
  • UOB has launched a new Financial Institution segment as it attempts to focus on sectors with high trade and connectivity flows as it continues to eye opportunities in the flow business, which will add to both loan and non-loan income.

Worst is over for oil & gas episode. 

  • With UOB having accelerated recognition of residual vulnerable exposures in oil & gas and related sectors, we deem that the worst is over for UOB’s oil & gas episode. UOB deems that it now has a comfortable level of allowance to meet the new requirements after the reversal of S$0.6bn of general provisions. 
  • Going forward, UOB expects new NPL formation to be at S$300-400m a quarter.

Credit costs a wildcard. 

  • For FY17, total credit cost came in at 28bps, below its traditional 32-bp credit cost guidance. However, it remains to be seen whether this is the “normalised” concept of Expected Credit Losses (ECL) going forward. 
  • For now, we have assumed total credit costs to be at c.26bps in our forecasts for FY18F/19F.

High capital levels – possible outcomes. 

  • Compared to its peers, UOB may require a higher capital buffer as it relies more on asset growth. It remains a possibility for UOB to take on acquisitions in the near term as it seeks to optimise healthy returns on its capital. In our forecasts, we have assumed a sustained 90-Sct DPS in FY18, representing a dividend yield of 3.4% at current share prices. 
  • With ample capital buffer, further dividend upside is still possible.

Management stated that it will be comfortable with CET1 of > 12.5%.

  • Changes to fee income treatment in P/L. With effect from FY18, UOB will be netting attributable expenses directly against its related fees, in line with peers’ practices. This would reduce cost-to-income ratio from 45.5% in FY17 to 43.7% on an adjusted basis. 
  • Going forward, we are forecasting UOB’s cost-to-income ratio to be at c.44% for FY18F.

Valuation & Recommendation

Maintain BUY, Target Price of S$29.50. 

  • We maintain our BUY call on UOB with Target Price of S$29.50. Our Target Price 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. 
  • We have made marginal tweaks to our FY18-19F earnings after incorporating actual FY17 numbers. 
  • We reiterate our three catalysts for the stock:
    1. The property market recovery bodes well for UOB as it is perceived to be a proxy - UOB has the largest proportion of property-related loans vs peers.
    2. Imminent NIM and loan growth improvement.
    3. End to its asset quality woes.
  • Coupled with higher dividends, these factors should support a re-rating for UOB.

Sue Lin LIM DBS Vickers | http://www.dbsvickers.com/ 2018-02-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 29.500 Same 29.500