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UOB 2Q17 Results Summary

Core Content

United Overseas Bank Limited (UOB) reported strong performance in the second quarter of 2017, driven by higher net interest income (NII) and loan growth. The report highlights both positive and negative factors influencing the bank's results, as well as future outlook and valuation analysis.

Main Points

Financial Highlights

• Net Interest Income (NII): Increased by 12% YoY to SGD 1,356 million, due to higher yields from interbank loans and customer loans growth.
• Total Revenue: Rose by 8% YoY to SGD 2,184 million.
• Net Profit: Grew by 5% YoY to SGD 845 million.
• Loan Growth: Total loans increased by 7.3% YoY to SGD 227,740 million, with significant growth in the property and construction sectors.
• NIM: Net interest margin remained stable at 1.73% for FY17e, reflecting the bank's ability to maintain profitability despite competitive pressures.

Key Strengths

• Property Market Recovery: Regional property markets improved, and UOB's housing loans maintained a low non-performing loan (NPL) ratio of 1%.
• Expansion in Southeast Asia: UOB is expanding in Thailand, Myanmar, and Vietnam, capitalizing on growing capital demand due to Chinese enterprises moving out of Greater China and the One Belt, One Road initiatives.
• Credit Rating: UOB holds a strong investment-grade credit rating of "AA", enhancing its credibility and growth potential.
• Regulatory Approval: UOB received a foreign-owned subsidiary bank license in Vietnam, making it the first Singapore bank to do so.

Key Challenges

• Competition in Housing Loans: The Singapore property market is highly competitive, which may pressure the net interest margin.
• Underperformance in Indonesia: UOB Indonesia's PBT contribution was lower than its peers, indicating room for improvement in the region.

Key Financial Data

Revenue and Expenses

• NII: 1,356 million SGD (2Q17) vs. 1,211 million SGD (2Q16)
• Fees & Comm: 517 million SGD (2Q17) vs. 475 million SGD (2Q16)
• Other Non-Interest Income: 311 million SGD (2Q17) vs. 338 million SGD (2Q16)
• Total Revenue: 2,184 million SGD (2Q17) vs. 2,024 million SGD (2Q16)
• Expenses: 995 million SGD (2Q17) vs. 927 million SGD (2Q16)
• Net Profit: 845 million SGD (2Q17) vs. 801 million SGD (2Q16)

Loan Growth by Industry

• Building and Construction: 8.8% YoY growth
• Housing Loans: 6.2% YoY growth
• General Commerce: 8.2% YoY growth
• Financial Institutions: 38.6% YoY growth

Loan Growth by Currency

• US Dollar: 12.6% YoY growth
• Thai Baht: 16.1% YoY growth
• Indonesian Rupiah: 5.1% YoY growth
• Others: 25.5% YoY growth

Profit Before Tax by Geographical Segment

• Singapore: 597 million SGD
• Malaysia: 154 million SGD
• Thailand: 57 million SGD
• Indonesia: 21 million SGD
• Greater China: 98 million SGD
• Others: 107 million SGD

Valuation and Investment Outlook

• Target Price: Revised to SGD 20.18 (from SGD 19.20), based on the Gordon Growth Model with a terminal growth rate of 2% and cost of equity of 9.5%.
• Valuation Ratios:
  • P/E (adjusted): 12.6
  • P/B: 1.20
  • ROE: 9.5%
  • ROA: 0.9%
• Investment Recommendation: "Reduce" with a target price of SGD 20.18, due to the potential for NIM to remain stable and the improving economic sentiment.

Key Ratios and Metrics

Outlook and Valuation

• NII Growth: Expected to remain stable at 6.8% for FY17e, supported by opportunities in interbank loans.
• Provisions: Estimated at SGD 730 million for FY17e, reflecting a 32 basis points credit cost.
• Valuation Method: Gordon Growth Model with a target price of SGD 20.18, based on a 9.5% cost of equity and 2% terminal growth rate.
• Market Performance: The stock's total return was estimated at -13.2% for the 3-month period ending 31 July 2017.

Investment Actions

• Recommendation: Maintain "REDUCE" due to the potential for NIM to remain stable and improving economic sentiment.
• Valuation: Based on the Gordon Growth Model, the report suggests a higher target price compared to previous estimates.

Key Takeaways

• UOB's strong performance in the second quarter of 2017 is attributed to increased NII and loan growth.
• The bank is well-positioned to benefit from expansion in Southeast Asia and the recovery of the Singapore property market.
• However, challenges remain in the Indonesian market, where UOB's performance is lagging behind its peers.
• Valuation is based on the Gordon Growth Model, and the target price reflects a more optimistic outlook for the bank's future earnings.