■ 3Q15 net profit (S$858m) was 8% above our estimate (S$792m) and 6% above consensus (S$812m) because of one-off gains from sales of investment securities.
■ Excluding the trading gains, most of the other positives including SP writebacks and a one-off special dividend (UOB’s 80th anniversary) appear unlikely to repeat.
■ Despite the earnings beat, we expect the credit cycle to be a challenge in ASEAN. However, we raise our estimates to factor in lower provisions, as reported in 3Q15.
■ Raise FY15-17 EPS by 2-7%, on reduced provisioning, and target price due to rollover. Upgrade from Reduce to Hold, as share price weakened in last 3 months.
3Q15 net profit beat solely due to strong trading-related income
3Q15 net profit (S$858m) beat our expectations and consensus, mainly due to one-off sales of investment securities.
Apart from that, 3Q reflected the slowdown in economic conditions and poor investment appetite, with:
1) flat loan growth qoq,
2) flat NIMs,
3) weaker fund management and WM fees,
4) marginally higher NPLs (1.3% vs. 1.2% in 2Q).
Gains aside, other positives were lower specific provisions and a special dividend.
Loan growth and margin outlook
Loan growth and net interest margins were flat qoq, the former dampened by currency effects (RM, Rp). UOB’s US$ trade loans expanded this quarter, but it moved away from low-margin corporate loans and allowed its S$ loan book to shrink. Loan growth was +1.9% YTD, marred by currency effects. Management is keeping its 5% loan target this year, in local currency terms. Across the region, all territories face similar challenges i.e. how achieve asset growth in a slow environment and avoid asset quality issues.
3Q total expenses were up (+13% yoy, +3% qoq). 3Q cost ratio (43.4%) only retreated because of the above S$100m investment gains. Ex-gains, 3Q cost ratio would have been as high as in 2Q (45.5%). Among the three banks, UOB’s absolute cost trend has risen ahead of peers, which is unusual.
Management cited these areas of cost pressure:
1) IT investment in digital banking, cyber-security, and
2) rising compliance costs.
New areas of asset quality deterioration, small but showing up
NPL ratio rose marginally (1.3% in 3Q vs. 1.2% in 2Q). Total provisions (32bp of loans, -65% qoq) fell in 3Q on SP writebacks (Thai over-provisions previously).
Biggest increase in new NPLs came from:
1) Singapore general commerce (working capital loans to trading-related companies),
2) building and construction (small developers), and
3) Indonesia transport (commodity sector malaise spreading to supporting industries).
Thai NPLs were lower in 3Q on NPL write-offs.
Weaker share price triggers upgrade
Three positives in this set of results were:
1) strong one-off investment gains,
2) special dividends, and
3) muted credit losses.
These, coupled with share price weakness since Jul, prompts us to revise our previous negative view on UOB
. We upgrade from Reduce to Hold
. 3Q15 earnings outperformed but as quite a few of the positives appear one-off in nature, we are not inclined to chase the stock, especially at this initial point of the credit cycle. Our target price is based on 1.06x CY16 P/BV, GGM. (Read Report)
Read Related Reports
1) United Overseas Bank Ltd - Rewarding shareholders on UOB80 by KGI Fraser Research, published on 2 November 2015
2) Idea Of The Day - United Overseas Bank by Lim & Tan Research, published on 2 November 2015
3) United Overseas Bank - Consistent performer by Maybank Kim Eng Research, published on 2 November 2015
4) United Overseas Bank Limited - Analyst Briefing Key Takeaways by Phillip Securities Research, published on 2 November 2015
5) UOB - Asset Quality Benign, Special Dividend Declared by RHB Research, published on 2 November 2015
6) United Overseas Bank - Regional business, loan portfolio holding up well by Daiwa Capital Markets, published on 30 October 2015
7) United Overseas Bank - 3Q15: Better, helped by non-core; Key mgt briefing takeaways by Deutsche Bank Markets Research, published on 30 October 2015
8) UOB - Lifted by trading gains by DBS Group Research, published on 30 October 2015
9) UOB - Buy: Stability – that is the best word to describe 3Q15 by HSBC Global Research, published on 30 October 2015
Source : CIMB Research
Labels: Banks, UOB