• 4Q16 PATMI of SGD739mn missed our 4Q16 estimate of SGD786mn by 6%.
• Surprise came from lower than expected Net trading income and Net gain from investment securities in 4Q16. And a slight q-o-q growth of 3.7% in net interest income was in line with our expectations.
• Maintain to “REDUCE” with a lower target price of S$18.92 (previously S$18.97) pegged at unchanged 0.95x FY17F PBR (excluding preference shares).

• Loans grew 8.8% year-on-year (“y-o-y”). Strong loans growth led by Housing loans, up 9.0% y-o-y; Building and construction loans, up by 15.6% y-o-y and General Commerce, up by 7.0%. Overall customer loans’ growth was led by Singapore customer loan base which grew 8.1% y-o-y.

• 4Q16 Net interest income was flat at SGD1.276bn (-0.1% y-o-y) due to NIM compression of 10bps y-o-y to 1.69%. The average rate on Customer loans which make up c.74% of interest earning assets declined 20bps y-o-y, offsetting a volume increase of 8.8% y-o-y. At the same time, average rate and volume of Customer deposits, which make up c.87% of interest bearing liabilities, increased 5bps y-o-y and 6.1% y-o-y respectively due to proactive liquidity management. Wholesale funding also increased 16.4% y-o-y to SGD40.1bn. Management has guided for stronger wholesale funding growth to bolster overall liquidity by tapping into European and North Asian investor base. Wholesale funding made up 14% of total funding by Dec 2016 compared to 13% in the same period a year ago.  However we view that wholesale funding is inherently more volatile than funding from Current Account and Savings Account (“CASA”).

• Coverage ratio increased to 116.3% from 111.4% in 3Q16 as a result of NPL ratio declining from 1.61% in 3Q16 to 1.47% in 4Q16. Total allowance remained unchanged quarter-on-quarter (“q-o-q”) at SGD4.046bn as specific provisions increased 48.3% q-o-q to SGD428mn offset by a SGD310mn utilisation of general allowances. As a result, provision expense declined 31.4% y-o-y to SGD131mn.

• Non-interest Income declined 6.3% y-o-y. The overall decline was mainly due to a 98.8% y-o-y decline in Net gain from investment securities and a 20.3% y-o-y decline in net trading income. The decline was offset by stronger performances from Credit Cards, up 14.1% y-o-y; Fund management, up 13.5% y-o-y and Wealth management, up 17.1% y-o-y.

Investment Actions

UOB continues to demonstrate control over their exposure to risky loans and management of provisions for non-performing loans. Therefore, with less surprises from provisioning expense, we expect UOB’s PATMI to be more stable than peers in 2017. However, we maintain that the outlook remains challenging as loans volume and rates dynamics continues to be unfavourable. We estimate FY17F PATMI growth of 4% on the back of a FY17F net interest income growth of 3% as compared to our previous estimate of 5%. This translates to 3% lower FY17F PATMI estimate compared to our previous FY17F estimate. Maintain “REDUCE” with a lower target price of S$18.92 (previously S$18.97). Our new target price is based on unchanged 0.95x FY17F book value (excluding preference shares).