United Overseas Bank Limited: Better margins and provisions drove growth May 4, 2018

PSR Recommendation: ACCUMULATEStatus: DowngradedTarget Price: SGD31.70
  • 1Q18 PATMI exceeded our estimates by 10% due to lower than expected impairments
  • NIM, lower impairments and fee were the key earnings drivers
  • Expect special and higher ordinary dividends as CET 1 surged to 14.9%, against 13% comfort level
  • We raised our target price to S$31.70 (previously S$29.00) on a higher ROE and earnings. Nevertheless, our rating has been downgraded to ACCUMULATE due to the share price performance.

1

The Positives

+ Net interest margins (NIM) at five-year highs. NIM touched 1.85%, the best in five years.  Almost 2/3 (or S$100mn) of the improvement in NII came from better margins. We have modelled in NIM of 1.9% for FY18e. Separately, UOB mentioned SGD deposits is turning more competitive and sourcing more USD deposits for their short-term trade finance loans.

+ Impressive momentum in asset gathering fees. Wealth income and fund management has driven fee income growth. Combined, both segments grew their fee income by 30% CAGR for past two quarters. This was an upside surprise to us. UOB has not been as aggressive as its peers in building up a wealth management platform via acquisitions, but it has still managed to grow fees at impressive rate.

+ Expect a large increase is dividends. UOB CET 1 has touched 14.9% against their 13% comfort level. The bank could return this capital through dividends or deploy the capital to compete more aggressively. Assuming a simplistic 1.5% decline in CET 1, this could release almost S$3bn in capital (or S$1.80 per share) in special dividends over next 2-3 years. We expect a combination of special and higher interim dividend in the coming quarter. Assuming 50% payout, ordinary dividend in 2018e could be at least S$1.20 per share.

The Negatives

– Loans growth was relatively soft. Loan growth was up 5% YoY in 1Q18 (DBS + 9% YoY).  SGD loans performed even poorer, a rise of only 2% YoY. In comparison, system loans in Singapore rose around 5%. UOB is focusing its efforts on overseas loans especially USD, where the yield pick-up is higher. SGD loans growth expected to be slower due to competitive pressure, until current housing loan pipeline is drawn down.

– Staff cost is outpacing income. Past two quarters have seen staff cost rising at mid-teens growth rate. This pulled up CIR to 44.2% (1Q17: 43.2%) despite the improvement in revenue. Staff cost is now trending at S$600mn per quarter run-rate against the S$500mn, just two years ago.

Outlook

UOB was hesitant on their outlook for SGD loans growth this year to the aggressive pricing environment. The focus seems to be on overseas and trade finance loan book. UOB still maintains a high single-digit loans growth target. Bulk of the growth in FY18e will come from margin expansion and lower impairments.

Figure 1: 2018e UOB guidance vs. PSR estimates

2

Investment Actions

We raised our target price to S$31.70 (previously S$29.00). Nevertheless, our rating has been downgraded to ACCUMULATE due to the share price performance. The improvement in target price was due to better ROE and higher terminal growth rates. Our FY18e earnings was revised upwards by 6%. We think there will be upside surprises in dividend paid in FY18e. Dividends will play a larger role in total returns for the stock.

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