Towards Financial Freedom
UOB - Soft Topline Growth In 2Q15
2Q15 earnings were slightly below market expectations. Net profit fell 5% QoQ and 6% YoY on lower trading and investment income and higher tax provisions. Maintain NEUTRAL with a revised TP ofSGD24.30 TP (9.5% upside), as we believe concerns over soft topline growth and asset quality have been largely priced in. The stock is trading at 1.15x FY15F P/BV (-1SD historical mean).
2Q15 a slight miss, earnings down 5% QoQ. United Overseas Bank (UOB) posted 2Q15 earnings of SGD761m (-6% YoY, -5% QoQ), accounting for 92% of consensus forecasts. Net profit fell on lower trading and investment income (-30.5% QoQ), negative jaws as operating expense rose 3% QoQ vs a 2% QoQ drop in operating income, and normalisation of tax provisions following a tax writeback in 1Q15. Interim DPS rose to 35 cents (1H14: 20 cents).
2Q15 key highlights. The positives were: i) stable net interest margin (NIM) as guided by management with improved loan pricing cushioning a slight uptick in funding costs, ii) healthy fee income momentum (+3% QoQ) underpinned by fund management and credit card businesses, and iii) liquidity improved with 3% YTD growth in customer deposits lowering loan-to-deposit ratio to 82.3% (Mar 2015: 83.4%). The keynegative was weaker-than-expected loan growth (+1.5% YTD) partly due to depreciation of regional currencies.
Asset quality sound. Gross impaired loans (GILs) rose 3% QoQ to SGD2.5bn led by Malaysia (+9% QoQ) and Indonesia (+7% QoQ), with reclassification prompted by the weak economic environment. Still, GIL ratio remained manageable at 1.24% (Mar 2015: 1.2%) while loan loss coverage was a comfortable 144% (Mar 2015: 147%; Dec 2014: 145.9%). Annualised credit cost was 30bps (1Q15: 34bps). Its Singapore housing portfolio had a SGD38m rise in GIL from eight accounts.
Management's 2015 guidance: i) loans growth of c.5%, ii) NIM to remain stable in 2H15, iii) credit cost to stay within 30-35bps with lower specific allowance in 2H15, and iv) cost-to-income ratio of 42-43%.
Maintain NEUTRAL. We cut our GGM-based TP to SGD24.30 (fromSGD25.40) after lowering our assumption on long-term growth. Our revised TP implies 1.3x FY15F P/BV. UOB's share price has underperformed its Singapore peers, reflecting investor concerns over its soft topline growth and asset quality of its ASEAN operations. However, at 1.1x FY15F P/BV, we believe much of the concerns are priced in.
Key Highlights From Management Briefing Asset quality remains sound. GILs rose 8% YTD to SGD2.5bn with the bulk of the increase coming from Singapore (+8% YTD), Indonesia (+12%), Malaysia (+10%) and Thailand (+8%).
In Singapore, its housing loan portfolio saw a SGD38m rise in GILs from eight accounts. Management has yet to set aside any provisions for these as the loans are well-collateralised with loan-to-value (LTV) at a low 53%.
In Malaysia, the rise in GILs was due to proactive reclassification of some accounts which may be impacted by economic headwinds. Nevertheless, management is not too worried as these accounts are well-collateralised.
Management is concerned about Indonesia's economic outlook. Although most of the new GILs were still performing accounts, the slowing economy has weakened cashflows.
Overall, management remains comfortable with its asset quality with GIL ratio at a manageable 1.24% (Mar 2015: 1.2%) and loan loss coverage at 144% (Mar 2015: 147%; Dec 2014: 145.9%). Management expects credit cost to be stable at c.30-35bps in FY15 (FY14: 30bps).
Valuation TP lowered to SGD24.30. Our earnings projections are relatively unchanged after minor tweaks for 2Q15 results. However, our GGM-based TP is lowered to SGD24.30 (from SGD25.40), as we trim our assumption on long-term growth to 3.0% from 3.25% given the softness in ASEAN economies. Other key assumptions are unchanged: i) ROAE (average of a 3-year forecast) of 10.6%, and ii) cost of equity of 10.2%. Our TP implies FY15F P/BV of 1.3x (historical mean: 1.3x) and FY15F P/E of 12.0x (historical mean: 11.6x).
Risks Factors that could result in UOB's share price rising above or falling below our TP are: i) sharper-than-expected NIM slippage or improvement that would impact revenue growth, ii) higher-than-expected credit cost should asset quality deteriorate further, iii) a material slowdown or a pickup in its ASEAN operations, and iv) stronger than-expected growth in fee income.
Source: OSK-DMG Research - 3 Aug 2015
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