More bad loans looming for UOB

NPL ratio to rise to 2.0% by end-2017.

Whilst UOB’s 3Q16 net profit was above expectations due to lower-than expected provisions, asset quality continued to deteriorate. RHB analyst Leng Seng Choon forecast the bank's non-performing loan ratio to rise to 2.0% by end-2017, from current 1.6%, on weakness in Oil & Gas sector and the general economy.

"Consequently, we forecast 2017 provisions to be 21% higher YoY. A widening 2017 NIM would help to counter the effects of higher provisions," the analyst noted.

With cumulative general allowances lower QoQ, and loan loss coverage down to 111%, the analyst believes provisions in subsequent quarters could rise from 3Q16’s level, although UOB’s 1.4% GP ratio provides some cushioning effect. Following the lower 3Q16 provisioning, we cut provisioning expectations and raise our 2016 net profit forecast by 6% to $3.06b.

"New oil & gas NPLs led ratio rise. We note 3Q16 NPL ratio of 1.6% was higher than 2Q16’s 1.4%, due to new oil & gas NPLs. Nevertheless, 3Q16 provisions rose 15% QoQ – lower than we expected – as UOB made specific allowances of $288m (+138% QoQ), but wrote back $113m of general allowances, which helped cap overall provisions," Leng noted. 

He furthered, "While we expect 2016 NIM to remain narrow at 1.71% (9M16: 1.72%), it should expand in 2017 along with the anticipated Fed Funds rate hike."

To recall, UOB registered net earnings of $791 million, 1.2% lower than the second quarter of 2016. It was 7.8% lower than the third quarter of 2015 as the prior year’s results included one-off gains from sale of investment securities.