(See also: UOB Group’s 4Q earnings decline 6.2% to $739 mil)
This was “thanks to a large write-back in general provisions,” says CIMB analyst Jessalynn Chen in a Friday report, noting UOB’s “relative outperformance” versus its peers.
UOB’s specific provisions (SP) had surged to $428 million in 4Q – an increase of $313 million from a year ago – due to non-performing loans (NPLs) in the oil and gas and shipping industries.
However, total allowance decreased 31.4% to $131 million in the quarter. This was mainly attributed to a $310 million write-back in GP.
“UOB’s over-provision of GPs in prior years paid off, with total coverage ratio still healthy at 116%,” Chen says.
CIMB is keeping UOB on “hold” but raising its target price to $20.37, from $18.42 previously, on the back of higher net interest margins (NIM), fees, and lower provisions.
“We see switching from DBS and OCBC to UOB given its relative outperformance, potentially bigger NIM uplift, highest coverage ratio, and confidence that its oil & gas collateral values have been sufficiently written down,” Chen says.
See also: RHB raises DBS target price to $57.10 after bank’s stock hits new high
DBS Group Research analyst Lim Sue Lin agrees.
The “worst could be over for UOB,” says Lim in a Monday report. “UOB remains the best buffered in terms of general provision reserves despite reversing a good chunk to offset higher specific provisions in FY16.”
DBS has upgraded UOB to “buy” from “hold”, with a higher target price of $22.70, from $21.80 previously.
“Of its peers, UOB stood out with asset quality prospects appearing more optimistic,” Lim says.
Maybank Kim Eng analyst Ng Li Hiang, too, believes UOB is “relatively more well-shielded from O&G loan impairments due to its lower sector exposure.”
“While there will be more SPs, management expects the impact to be less significant in 2017,” Ng adds in a Monday report.
Ng notes that credit cost is expected to be maintained at 32 basis points in FY17. “For every 10bps decline in credit costs, we estimate FY17 net profit to increase by 7%, ceteris paribus,” Ng says.
For more stories about where money flows, click here for Capital Section
Maybank has raised its FY17-18E net profit forecast by close to 8% each, on the back of assumption of higher loan growth and lower provisions.
Despite this, Ng says the brokerage is maintaining its “hold” call on UOB as it “await[s] signs of a bottom in asset quality deterioration and/or rising rates”, while increasing its target price by 6% to $19.54.
However, RHB analyst Leng Seng Choon cautions that non-performing loan ratio, which had fallen to 1.5% in 4Q partly due to higher write-offs, could increase ahead amid the soft economic environment.
“We project a higher NPL ratio of 1.7% by end-2017, due to the oil & gas space and slowing economy,” Leng says in a Friday report.
RHB is keeping UOB at “buy”, and raising its target price to $23.90, from $22.90 previously.
“UOB’s GP ratio of 1.2% remains higher than peers and provides scope for UOB to further write-back in the quarters ahead,” Leng adds.
Meanwhile, OCBC Investment Research lead analyst Carmen Lee believes UOB’s focus “appears to be on managing efficiency despite the uncertain external environment”.
In a Friday report, Lee notes that UOB’s management expects non-performing assets fall from 2016 levels and NPL ratio to be stable.
OCBC is keeping it “hold” call on UOB, and raising its fair value estimate to $20.55, from $18.78 previously.
As at 1.39pm, UOB is trading 8 cents higher at $21.26.
