Friday, 9 January 2015

United Overseas Bank

Kim Eng on 8 Jan 2015

  • UOB sues Lippo and seven others for “conspiring” to get inflated home loans of SGD181m.
  • Classified as NPLs since Jun 2014, with some provisions. Little EPS impact.
  • Maintain BUY & 12x FY15E PER TP. Catalysts from strong SGD deposit growth and improving housing NPLs. Top sector pick still DBS.
Files lawsuit for loan defaults
According to The Straits Times, UOB is suing Lippo Group’s subsidiary and seven others over SGD181m in housing loans for the purchase of 38 condominium units at Marina Collection in Sentosa. Loans for 37 of these have defaulted. It said it was not informed of the 22-34% discounts offered for the units and that the buyers had secured inflated home loans from the bank.

Largely accounted for, little EPS impact
We understand from management that these loans were already classified as NPLs in 2Q-3Q14. Cross-checks with disclosed financials indicate a net increase of SGD169m in UOB’s housing NPLs during these two periods (Figure 1). Management does not expect more to be recognised. Some specific provisions have been made and not much more is expected. This is because the loans have LTVs of 75%, based on current market valuations. No unit has been auctioned off. As we suggested in our 5 Jan sector note, “Xenophobia” unwarranted, UOB should be the most exposed to Sentosa. But as much of its mortgage growth occurred during the early housing boom, its NPL risks should be limited.

Reiterate BUY; DBS preferred
TP still at SGD26.70 or 12x FY15E PER, slightly below its rolling mean since 2005. For exposure, prefer DBS (BUY, TP SGD23.50).

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