Positives

+ Loan growth performed better than expected at 12.2% YoY, led by a broad-based increase across all territories and industries. Housing loans grew 3.3% YoY, outpacing Singapore’s housing loan growth of only 0.9% YoY in 1Q19. UOB’s mortgage loan business is facing intensifying competition for refinancing and lesser new mortgage loan bookings due to a lower volume of property launches. Building and Construction loans registered a growth of 22.3% YoY (the highest in three years) due to the progressive drawdown on development project loan commitments made during the en-bloc fever phase last year.  Property launches are seasonally weaker in the first half of the year, and customers should re-enter the market as en-bloc funds kick in this year. Hence, we expect mortgage loan growth to pick up in 2H19, and we pen in a higher FY19e loan growth estimate at 5.9% (previously 5.0%), in line with the mid-single-digit guidance.

+ Other non-interest income surged 40.3% YoY. Net trading income grew 38.9% YoY to S$243mn due to a rebound in financial markets.  Gains from investment securities rose 133.3% YoY to S$28mn, recovering from 4Q18’s loss of S$59mn from market volatility.  

+ Credit costs for impaired loans stable at 13 bps (1Q18: 12 bps). Overall credit costs rose 8bps YoY to 19bps due to higher ECL provided for non-impaired loans which grew in tandem with higher loan growth this quarter. We raise our credit costs to 20 bps from 16 bps in tandem with higher ECL for non-impaired loans, in line with guidance of 20-25 bps. Asset quality remained resilient with NPL ratio at 1.5% (1Q18: 1.7%).

Negatives

– 1Q19 NIM fell 5bps YoY 1.79% due to competitive loan repricing conditions and excess deposits gathered.  As a result, net interest income dipped slightly by 1.3% QoQ. LDR fell to 86.6% (4Q18: 88.2%) as deposits grew faster than loans at 12.4% YoY. Deposits growth came mainly from Singapore (+12% YoY) and Greater China (+16% YoY).  However, the majority of UOB’s fixed deposits have a short tenure of 3 to 6 months. UOB might let some of the deposits run off in the next few quarters to reduce some of the excess deposits gathered. Blending in the effects of loan repricing and reducing excess deposits to lower the cost of funds, NIM should recover in the next few quarters. We maintain NIM for FY19e at 1.82%, in line with flat NIM guidance.

– Fee income fell 7.4% YoY to S$479mn. The contraction came mainly from a decline in fund management and wealth management fees by 23.5% YoY and 17.6% YoY respectively due to exceptionally buoyant market sentiments a year ago. However, wealth management fees rose 19.3% QoQ as market sentiments picked up since March this year. The wealth management business should continue to improve if the macroeconomic environment does not worsen.

Investment Actions

Downgrade to ACCUMULATE with a lower target price of S$30.90 (previously S$32.00), due to recent share price movement. The lower target price was derived after raising our operating expense forecasts 5% higher; giving us an FY19e CIR of 44% (previously 42%), resulting in lower FY19e revenue growth of 8.1% instead of 11.3% previously.

Expect NIM to pick up with more aggressive loan repricing and prudent management of excess deposits. Despite softer loan growth expectations due to market headwinds, UOB’s solid loan growth in 1Q19 sets a positive tone for earnings as the loan book undergoes progressive repricing. There are currently no material concerns about portfolio quality, and housing loans remain protected by prudent underwriting measures. UOB remains attractive with healthy FY19e dividend yield of 4.4%.