United Overseas Bank - No negative surprises expected

Inexpensive at 1x forward book

Trades at a 40% discount to historical mean
UOB is trading at 1x 2016 book, 40% below the historical mean. We believe as concerns over asset quality diminish in 2016 and as local interest rates rise further, UOB could re-rate strongly. We believe UOB’s underperformance in 2016 has been due to concerns over asset quality, slowdown in the region and fears of potential capital controls in its second-largest market, Malaysia.

Benefits from interest rates
Contrary to the popular perception that UOB may find it difficult to increase its NIMs in this environment, it has been able to increase its NIM by 8bp YTD. While we estimate that it did not benefit from the rise in local interest rates as much as DBS, it did get additional support from improving liquidity in its Indonesian operations. We believe this could continue into 2016 as we expect interest rate cuts in Indonesia, and this should help its Indonesian NIMs improve further.

Expect a bit of the same in the coming quarters
UOB’s recent 3Q results were in line with expectations. Non-performing loans (NPLs) rose marginally by 10bp to 1.3%, but there was no big jump in provisioning. Most of the operating ratios such as NIMs and cost-to-income were stable. We believe the results in the next two quarters could be similar, ie, in line and no negative surprises.

Technical Analysis
Daily Chart
Valuation: Our TP implies a 12-month forward P/BV of 1.3x
We revise down our 2015 by 4%. Our target price of SGD 27 is based on the Gordon Growth Model with the key assumptions being a COE of 9.5% and ROE of 13%. (Read Report)

Source : Nomura Global Markets Research

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