United Overseas Bank (UOB) - UOB Kay Hian 2018-10-29: 3Q18 Disheartened By NIM Compression


United Overseas Bank (UOB) - 3Q18: Disheartened By NIM Compression

  • Investors are disappointed that NIM compressed 2bp q-o-q to 1.81%. Management has taken precautions to build up fixed deposits as UOB expects increased competition for funds towards the end of the year. NIM should recover in subsequent quarters, as fixed deposits collected are progressively deployed as loans.
  • At this moment, management does not see a systemic impact on asset quality from the trade war.
  • Management expects loan growth to maintain in the high single-digits levels in 2019.


  • United Overseas Bank (UOB) reported a net profit of S$1,037m for 3Q18, up 17.4% y-o-y. The results were in line with consensus estimate of S$1,011m.

Maintains steady pace for loan growth.

  • Loan growth was at 2.2% q-o-q and 9% y-o-y in 3Q18. The sequential expansion was driven by Singapore (+1.9% q-o-q, +4.5% y-o-y) and Thailand (+4.3% q-o-q, +13.3% y-o-y).
  • On a sectoral basis, loans expanded by 4% q-o-q for the building & construction segment and 2.8% q-o-q for the professionals & private individuals segment.

Negative surprise from NIM compression.

  • NIM narrowed by 2bp q-o-q to 1.81% affected by higher cost of deposits. Fixed deposits expanded by S$7b or 4.7% q-o-q.
  • UOB built up deposits to meet projected business growth ahead of further increases in interest rates. NIM for Indonesia (4.4% of total loans) also narrowed by a significant 69bp q-o-q to 3.53% due to increased competition for deposits with hikes in interest rates and cap on loan yield due to the single-digit lending rate policy.

Moderation in growth for fee income.

  • Fees increased just 1.5% y-o-y in 3Q18. Contribution from wealth management was flat q-o-q but dropped 7% y-o-y. This was offset by growth of 7% y-o-y for credit cards, 10% y-o-y for loan administration and 9% y-o-y for trade finance.
  • Net trading income also receded 23.7% q-o-q to S$174m.

Negative JAWS.

  • Operating expenses increased by 12.3% y-o-y in 3Q18, faster than growth in total income of 7.5% y-o-y. Staff costs increased by 15.3% y-o-y. Cost-to-income ratio was at 43.4%, comparable to 43.6% in 2Q18 but higher than 41.6% in 3Q17.

Asset quality stable.

  • NPL balance dropped 0.5% q-o-q in 3Q18. Overall, NPL ratio improved by 4bp to 1.64%. Thailand contributed substantially to the improvement in asset quality with NPL balance decreasing by 13.7% q-o-q and NPL ratio improving 0.6ppt to 2.5%.
  • The bank disposed its portfolio of impaired consumer loans in Thailand.

Credit costs remain subdued.

  • Provisions remained low at S$95m or 15bp, similar to that in 2Q18, as asset quality remains benign. The huge drop in provisions of 57% y-o-y was due to large provisions for the oil & gas and shipping sectors last year.


Impact of trade war on asset quality.

  • Management has conducted stress tests on a top-down and bottom-up basis. At this moment, management does not see a broad systemic impact on asset quality as a result of the trade war. Management will monitor companies that could be affected. It will consider accelerating the recognition of special mention loans and putting in appropriate general provisions.

Trade activities unaffected.

  • Loan growth for the manufacturing sector could be affected as companies hesitate to commit on capex. However, volume for intra-regional trade is holding up and margins for trade finance have expanded.
  • Management sees suppliers in Asean countries benefitting as alternative sources to suppliers in China.

Facilitating the expansion of manufacturing activities in Asean countries.

  • UOB has the strongest regional footprint across Asean countries. The bank would benefit if factories relocate from China to Asean countries. Management sees Thailand and Vietnam as key beneficiaries.
  • Financing the expansion of manufacturing capacities within Asean countries is a key task for Wholesale Banking in 2019. However, management contends that shifting high-end manufacturing activities is difficult as it involves uprooting an entire supply chain.

Sanguine outlook for 2019.

  • Management expects loan growth to maintain at high-single-digit levels and fees to increase 10% for 2019.

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-29
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