United Overseas Bank - Plenty of positives but seemingly one-off

■ 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.

Cost challenges
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.

Technical Analysis
Daily Chart
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: ,