United Overseas Bank Limited – Business as usual February 24, 2020 898

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: S$19.28 Target Price: S$27.8
  • 4Q19 revenue and PATMI were in line with estimates.
  • Net profit grew 10% YoY on stellar trading income almost quadrupling to $224mn from $59mn in 4Q18 while NII and fee income growing a modest 2% apiece YoY.
  • 4Q NIM fell 4bps YoY to 1.76% despite stable asset yield and funding costs a result of increased interest-bearing liabilities from growth of customer deposits YoY (+3% YoY).
  • Proposed final dividend of 75 cents; consisting of 55 cents core dividend and 20 cents of special dividend, bringing dividend for FY19 to $1.30 per share (+8% YoY). This brings dividend yield to c.5.0% based on current price.
  • Maintain ACCUMULATE with an unchanged target price of S$27.80. We hold FY20e stable after factoring headwinds in previous quarters.

 

Positives

+ 4Q trading income quadrupled YoY. With a recovery in market conditions, trading income leapfrogged on gains from investment securities and better customer-related flow income, buoying slower growth from NII and fee income, both of which grew +2% YoY. Slight increase in NII was a result of modest growth in loans of 3% YoY despite a NIM compression of 4 bps while fee income was held up by WM fees (+42% YoY), offsetting lower loan-related fees (-25% YoY).

 

Negatives

4Q CIR rose to 45.9% from 44.4% YoY. IT-related expenses grew 36% YoY on continued investments in to grow connectivity in order to boost long-term efficiency among franchises. Staff-related costs grew in tandem with growth in income due to performance-related staff costs. Moving forward, the bank aims keep CIR stable with a paced investment approach.

– Allowances rose 14% YoY on impaired loans. Asset quality remains benign with NPA growing a moderate 2% YoY due to a lower base in 4Q18. Credit costs rose 4 bps to 24 bps from a year ago but full year credit costs came in below expected range of 20-25 bps at 18 bps. NPL remains low at 1.5%, unchanged YoY.

 

Outlook

Active stance to de-risk North Asia exposure may insulate impact of short-term risks. On expectations of greater headwinds arising from Greater China, the bank has been actively managing exposures to the region to reduce short-term risks. Total Greater China exposure stands at 15% of total assets, while potential vulnerable industries within Hong Kong making up $5bn or 8% of total Greater China exposure. Majority of loan tenor are also below 1 year, and NPL ratio remains at respected levels of below 1%.

Sluggish growth from global uncertainty. NIM compression will stunt NII growth in FY20e and non-interest income may also be dented from weaker market sentiments with outbreak of Covid-19 outbreak.

 

Investment Actions

Maintain ACCUMULATE with an unchanged target price of S$27.80.  We expect stability in earnings for FY20e that was revised downwards in the previous quarter.

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Profile photo of Tay Wee Kuang

Tay Wee Kuang
Research Analyst
Phillip Securities Research

Wee Kuang currently covers the Banking and Finance as well as the Healthcare sector. Wee Kuang has had 2 years of experience as a Trading Representative (TR) before his current stint as an Analyst. As a TR, Wee Kuang developed a keen interest in investor education and hopes to be able to provide better insights for investors in his current role.

Wee Kuang graduated with a Bachelor of Business Management (Cum Laude) with major in Finance and Operations Management in 2017.

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