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2 Catalysts UOB is Lacking for Potential Upside
Aspire, Hot Picks | 10 September 2015
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By: Lim Si Jie
Articles (169) Profile

2Q15 Performance

Mixed 2Q15 Performance

UOB reported a net profit of $762 million (-4.9 percent QoQ, -5.7 percent YoY) with normalisation in higher income tax and associates contribution. The result was slightly better than expected, thanks to higher non-interest income. Loan growth saw a slight decline (-0.5% QoQ) while Net Interest Margin (NIM) saw a slight expansion (+1 bp QoQ). Non-interest income aside, it was a mixed set of results.

Lack of Catalysts

Higher SIBOR to Have Limited Impact

Higher rates now would have a very different impact on UOB’s earnings, as compared to the 2005-06 rate cycle. In the current cycle, a 100bps move in rate would lead to Net Interest Income increase of $300-400 million, as well as a $180 million pick-up in credit costs as debt servicing burden for borrowers will move up. Hence, the net gains from even a 100bp rate hike would be rather limited. This is very different from the situation in 2005-06, when the bank’s earnings increased by 50 percent YoY in FY06 for a 194bp move-up in SIBOR.

Downgrade: Lack Of Catalysts for Any Upside

UOB’s balance sheet has shrunken QoQ, following a trend of shrinking balance sheet across the sector that is likely to persist. While Singapore NIMs, driven by better loan and deposit pricing,  probably have some upside, it is likely to be offset by the pressure on ASEAN NIMs. Costs are likely to rise at a faster rate than UOB’s peers. Impairments are also likely to continue to rise, albeit less than peers given UOB’s stronger buffers and higher credit costs.

A lack of revenue drivers, higher costs (both staff and technology) and taxes drove earnings downgrades from various research houses. UOB should expect to see a tough year on year comparisons ahead. While valuations are pricing in some of this, they don’t look compelling enough to be more positive on UOB.

Interim Dividends Raised

Interim dividend was boosted to 35 cents (from 20 cents in 1H14). That being said, analysts are forecasting that the higher interim dividend is to balance dividends throughout the year rather than to raise the final dividends for 2015. However, the management is aiming to maintain core yearly dividend at 70 cents (before any special dividend).

Trading Income Weakness

UOB’s Q2 results could have shown better performance had it not been for lower trading income (-30 percent QoQ) and higher taxes. While the fall in trading-related income should be considered as one-offs from UOB’s Profit and Loss (P&L), tax normalization is likely to continue to be a drag for 2H15. The management is expecting higher normalisation for 2H15. Higher costs were also another drag for Q2 and are likely to persist as the management expects to continue investing in staff and digital capabilities.

2H15 Outlook

Deterioration in Asset Quality

There was a mild deterioration in UOB’s asset quality, particularly in both the Singapore housing and ASEAN portfolios, which caused the overall NPL ratio to move up slightly from 1.20 percent to 1.24 percent.

Thailand: Loan Growth at Steady Pace

Having taken the hit on asset quality two years ago, UOB focused only on a niche segment in Thailand, resulting in a stronger loan book. UOB is now looking to expand beyond its Bangkok focus to increase in scale. Given a low base, UOB should continue to have a steady growth path.

Singapore: Recovery Not in Doubt

The bank has delivered 14 percent growth in mortgages in the last five years and 17 percent growth in building and construction loans, and both of them pose risks of forming Non-performing Loans (NPLs ). Following the large NPL formation in 2Q last year, we have become wary of credit underwriting standards for the bank’s real estate loans.

Singapore housing portfolio saw new NPLs amounting to about $38M from a total of eight accounts. But UOB has not taken any new specific provisions on these accounts as the LTVs are pretty low and management is confident of recovering the loan amount in full.

Malaysia: Reclassification of Loans

The increase in Malaysia Non-Performing Loan (NPLs) was due to pro-active classification of a performing account (collateralised). While the management appears to be quite confident about the asset quality of the Malaysia loan book, Indonesia remains a bigger concern for UOB.

The management believes that having taken enough graduated payment loans over the past few years, UOB is still very confident of maintaining overall credit costs below 35 bp over the next two years.

In overall, UOB’s management does not foresee any systemic stresses in these portfolios. Credit costs should be 30-32 bps for 2015 based on management’s guidance.

Take a look at the other articles that SiJie had written on the other banks:

DBS: 6 Reasons Why DBS Is The Top Pick Among Banks

OCBC3 Reasons To Pick OCBC Up Now And Not Later

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

United Overseas Bank  25.760 +0.06 +0.23%   
Business: [FY18 Turnover] Group retail (43.3%), group wholesale (43.2%), global markets & investment management (5.1%), others (8.4%).

Insight: May-19, 1Q19 total income rose 7.8% to $2.4b due t... Read More

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