United Overseas Bank - PhillipCapital

1 Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 118/10/2015 Ref. No.: SG2016_0159 United Overseas bank limited Watch out for persistently low rates and competition SINGAPORE | BANKING | RESULTS 2Q16 NPAT of S$801mn was up yoy contributed by a yoy increase in other non-interest income. 2Q16 NIM decreased 9bps yoy to (2Q15 NIM: ) and decreased 10bps qoq (1Q16 NIM: ) 2Q16 NPL was higher yoy at (2Q15: ) and higher qoq (1Q16: ) Maintain to "NEUTRAL with a lower target price of S$ (previously S$ ) pegged at unchanged FY16F PBR (excluding preference shares) Results at a glance(SGD mn)2Q162Q15y-y (%)1Q16q-q (%)CommentsNI I1,2111,2120%1,275-5%Hi ghe r l oa ns growth yoy; NI M l owe r yoy a nd qoqFe e s & Comm4754652%43310%Hi ghe r WM a nd Cre di t Ca rds fe e sOthe r Non I nt I ncome33824836%26229%Hi ghe r tra di ng ga i nsTotal Revenue2,0241,9255%1,9703%Expe ns e s9278766%8954%Net Profit8017625%7665%Source : Compa ny, PSR How do we view this?

2 Strong loans growth in 2Q16 despite weak economy. 2Q16 building and construction loans grew 20% yoy and housing loans grew yoy. Management have alluded the strong growth in building and construction loans to infrastructure projects in Malaysia and businesses from global property funds active in the Asian region. Singapore Housing loans are a substantial component in UOB s loans book accounting for approximately of 2015 total gross loans ( by 2Q16). However in the second half of 2016, we expect stiffer competition amongst banks for a bigger share of Singapore housing loans because Singapore housing loans are probably the single most coveted high quality asset for banks in today s weak economy. We do not expect UOB s housing loans growth to continue at the same pace as previous quarters.

3 NIMs greatly impacted by decline in SIBOR and SOR from 1Q16 to 2Q16. Comparing 2Q16 to 1Q16, UOB s loans were priced lower but costs of funds remained elevated. This caused NIMs to compress drastically in 2Q16. Moving forward, Management highlighted that trimming high cost deposits is a priority but are also concerned about maintaining strong liquidity. We opined that NIMs compression could persist with intensified competition and exacerbates if rates continue to be low. 40% of Singapore loan books are priced in SIBOR or SOR, making UOB Singapore loans sensitive to SIBOR and SOR fluctuations. NPLs rose 8bps qoq. New NPL formation was partly contributed by Singapore based companies in the oil and gas industry. By industry segment comparison, General Commerce NPLs indicated a sharp increase of 59% qoq to S$610mn.

4 By geographic segment comparison, Singapore based NPLs indicated a sharp increase of 31% qoq to S$ Allowance cover for 2Q16 is (1Q15 allowance cover: ). Investment Actions Maintain "NEUTRAL with a lower target price of S$ (previously S$ ). Our new target price is based on unchanged FY16F book value (excluding preference shares). Weak demand for credit and stiffer competition for Singapore housing loans is expected to crimp loans growth in second half of 2016. We also see that UOB s FY16F earnings will be greatly affected by low interest rates and competition for deposits. 1 August 2016 Neutral (Maintain)CLOSING PRICEFORECAST DIVTARGET PRICETOTAL RETURNCOMPANY DATAO/S SHA RES (M N) :1,607 M A RKET CA P (USD mn / SGD mn) :21667 / 2925352 - WK HI/LO (SGD) / A verage Daily T/O (mn) MAJOR SHAREHOLDERS (%) Hin & Co P te Ltd Gro PERFORMANCE (%)1M T H3 M T H1Y RCOM P A ( ) ( ) STI ( ) PRICE VS.

5 STISo urce: B lo o mberg, P SRKEY FINANCIALSS G D M NF Y 13F Y 14F Y 15F Y 16 FTo tal Operating Inco me6,718 7,457 8,048 7,939 Operating P ro fit3,391 3,675 3,781 3,639 NP A T3,023 3,264 3,222 3,143 EP S (SGD) P ER, x (adj.) ROCE, % urce: B lo o mbergValuation Method: P/BJeremy Teong (+65 InvestmentsB lackro r-16Ma y-16 UOB SP EQUITYFSSTI index Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE) United Overseas bank LTD RESULTS Table 1. Fee and commission incomeSGD mn2Q162Q15%y-y ch1Q16%q-q chCre di t ca rd90 86 ma na ge me nt43 45 nve s tme nt-re l a te d110 108 n-re l a te d114 111 rvi ce cha rge s31 29 de -re l a te d66 66 r21 20 l475 465 2.)

6 Other non-interest incomeSGD mn2Q162Q15%y-y ch1Q16%q-q chNe t tra di ng i ncome216 114 r i ncome29 36 t ga i n/(l os s ) from i nve s tme nt s e curi ti e s39 42 vi de nd i ncome24 27 nta l i ncome29 29 l othe r non i nt i nc337 248 3. Loans by IndustriesSGD mn2Q162Q15%y-y ch1Q16%q-q chTpt, s tora ge & comms8,897 9,590 ,388 l di ng a nd cons tructi on48,761 40,648 ,729 nufa cturi ng16,703 17,164 ,562 na nci a l i ns ti tuti ons11,778 15,834 ,154 ne ra l comme rce27,857 27,550 ,733 s s i ona l s & Pri i nv26,599 25,829 ,828 i ng l oa ns59,272 55,295 ,346 rs12,414 10,497 ,620 l l oa ns212,281 202,407 ,360 4.

7 Loans by currenciesSGD mn2Q162Q15%y-y ch1Q16%q-q chSi nga pore dol l a r111,119 107,614 ,574 dol l a r37,589 33,568 ,202 l a ys i a n ri nggi t23,240 23,352 ,540 i ba ht11,146 10,501 ,864 ndone s i a n rupi a h5,101 4,567 ,917 rs24,085 22,805 ,263 l l oa ns212,280 202,407 ,360 Table 5. Profit before tax by Geographical segmentsSGD mn2Q162Q15%y-y ch1Q16%q-q chSi nga pore558 560 l a ys i a125 137 i l a nd58 43 ndone s i a20 10 a te r Chi na66 92 rs141 96 NPBT968 938 (ta bl e s 1-5): Compa ny, Phi l l i p Se curi ti e s Re s e a rch Page | 3 | PHILLIP SECURITIES RESEARCH (SINGAPORE) United Overseas bank LTD RESULTS Fig 1: Net interest marginFig 2: NonII/Total revenueFig 3: Efficiency ratioFig 4: Net profit marginFig 5.

8 Deposits, Loans, LDRFig 6: NPA, NPLFig 7: Growth in selected asset itemsFig 8: CARFig 9: ROE and ROAFig 10: EPS and in terest i ncome - LH terest i ncome - LH SNonII/to tal inco me (%) - RH enses - L HSEf f icie ncy ratio ( %) - RHS44 44 45 43 44 43 41 40 41 38 39 40 profi t - LHSNet prof it margin (%) - RHS8889868886848382828581847479848994 - 50,000 100,000 150,000 200,000 250,000 300,0003Q134Q131Q142Q143Q144Q141Q152Q153 Q154Q151Q162Q16Cu s depCu s loan sLDR (%) - - 50 100 150 (%) - RHST otal cu mulati ve impairment as % o f NP A - 50,000 100,000 150,000 200,000 250,000 300,000 350,0003Q134Q131Q142Q143Q144Q141Q152Q153 Q154Q151Q162Q16Lo an s to non bank customersCash equi valen tsFinanc ial assets an d i nvestments - 5 10 15 203Q134Q131Q142Q143Q144Q141Q152Q153Q154Q 151Q162Q16 Tier 1 CART otal - RHSROA - luted NAV - RHSDi luted EPS exc lud e extra i tems - L HS Page | 4 | PHILLIP SECURITIES RESEARCH (SINGAPORE) United Overseas bank LTD RESULTS Fig 11: Revenue by geographical segmentFig 12: Geo segment breakdownFig 13: Revenue by Business segmentFig 14: Net interest income trendFig 15: Fee and Commission trendFig 16.

9 Other noninterest income trend - 200 400 600 800 1,000 1,200 1,400S'poreM'siaThaiIndonG. ChinaOther1Q152Q153Q154Q15S'pore, 1,182 , 58%M's i a, 241 , 12%Tha i, 203 , 10%I ndon, 121 , 6%G. Chi na, 151 , 8%Othe r, 126 , 6% - 200 400 600 800 1,000 1,200 1,4003Q134Q131Q142Q143Q144Q141Q152Q153Q1 54Q151Q162Q16 Net in terest i ncomeSMA 360 380 400 420 440 460 480 5003Q134Q131Q142Q143Q144Q141Q152Q153Q154 Q151Q162Q16 Net fee an d co mmissio n i ncomeSMA - 50 100 150 200 250 300 350 4003Q134Q131Q142Q143Q144Q141Q152Q153Q154 Q151Q162Q16 Other no nin terest in come tren dSMA (20 0) - 200 400 600 800 1,000 Group retailGroup WholesaleGlobal marketsOthers1Q152Q153Q154Q15 Page | 5 | PHILLIP SECURITIES RESEARCH (SINGAPORE) United Overseas bank LTD RESULTS FinancialsIncome Statement (SGD mn)Balance Sheet (SGD mn)

10 Y/E Dec, SGD mnFY13FY14FY15FY16 FFY17FY/E Dec, SGD mnFY13FY14FY15FY16 FFY17 FNe t I nte re s t I ncome4,1194,5584,9254,8415,040Ca s h ba l wi th ce ntra l ba nks26,88135,08332,30624,33128,729Fe e s a nd Commi s s i on1,7311,7491,8841,8501,855 Due from ba nks31,41228,69228,64633,78532,196 Othe r Non i nte re s t i ncome8681,1501,2391,2481,318I nve s tme nt s e curi ti e s12,14011,44010,56210,97711,004 Total operating income6,7187,4578,0487,9398,213 Loa ns to non-ba nk cus tome rs178,857195,903203,611205,583207,287 Ope ra ti ng e xpe ns e s2,8983,1473,5963,6843,746 Othe rs34,94035,61840,88645,10843,985 Provi s i ons429635671616599 Total Assets284,230306,736316,011319,784323,20 1 Operating profit3,3913,6753,7813,6393,868 Due to ba nks 26,24711,22611,98610,35210,455As s oci a te s & JVs191149909090 Due to non-ba nk cus tome rs202,006233,750240,524246,723247,208 Profit Before Tax3,5823,8243,8713,7293,958De bts i s s ue d18,98120,95320,28817,41617,590Ta xa ti on559560649586620 Othe rs10,41711,03512,28912,65813,037 Profit After Tax3,0233,2643,2223,1433,338 Total liabilities257,651276,964285,087287,1492 88,291 Non-control l i ng I nte re s t1715121616 Sha re hol de r's e qui ty26,39129,57230,77132,46334,722 Net Income, reported3,0063,2493,2103,1273,322 Non-control l i ng i nte re s t189203156172188 Net Income, ,0063,2493,2103,1273,319 Total Equity26,58029,77530,92732,63534,910 Per share data (SGD)