+ FY18 NIM rose to 1.82%, a 5 bps increase YoY. Asset yield rose 43 bps YoY, but the cost of funds rose more by 47 bps YoY, giving little room for NIM expansion QoQ due to a timing difference in interest rate rise. Management guided NIM to be flat for 2019, with a slight upward bias (assuming no further rate hikes). Mortgage repricing to be the bright spark to spur NIM expansion in 2019. With the recent dovish tone on future rate hikes by the U.S. Federal Reserve and challenging environment, we lower our NIM estimate for FY19e from 1.90% to 1.84%.
+ Loan growth exceeded guidance slightly at 10.9% YoY. Loan growth was driven by loans to building and construction (+17.7% YoY) and financial institutions (+21.5% YoY). Geographically, loan growth was driven by Singapore (+7.5% YoY) and Greater China (+24.1% YoY). Property related loans remain the largest portion with 50.3% of total loans. We expect loan growth to slow to mid-single-digit growth due to property cooling measures, sentiments and global economic slowdown. Thus, we tone down our FY19e loan growth estimates to 5.0% from 5.9%.
+ FY18 credit costs a low of 16 bps (FY17: 61 bps), reflecting a benign credit environment in 2018 and low residual risk from the oil and gas services sector. Credit costs is expected to normalise to 20-25 bps amidst a lower growth environment. There are no material concerns about overall portfolio quality, and housing loans remain protected by prudent underwriting measures.
– FY18 Cost-to-income ratio was up slightly at 43.9% (FY17:43.7%), in line with guidance. Management reiterated a CIR guidance of c.44% in the near term and to trend downwards to c.40% CIR in the long term. We believe the CIR will improve across the franchise in time as interest margins rise and cost efficiencies are heightened with digitalisation efforts.
– Other non-interest income declined 25.0% YoY; due to unrealised mark-to-market on investment securities arising from market volatility and lower gains from the sale of investment securities.
Expect loan growth to slow to mid-single-digit growth due to property cooling measures, sentiments and sluggish global economic growth. The bulk of UOB’s loans book is anchored out of SE Asia, with the majority of belonging to Singapore (52% of total loans). With the gradual shift in supply chain out of China into SE Asia, UOB might even benefit from an increase in regional supply chain capacity. We expect ongoing global uncertainty to weigh on business sentiments in the near term, but the structural growth story for SE Asia remains intact.
Rising interest rates still a key factor. Majority of UOB’s loans take three months to reprice. Therefore there is still a lag time in repricing. Near-term competitive pricing might result in a squeeze in margins, but NIM should improve as UOB gains more pricing power with the rise in interest rates especially in housing loans. Any further upside will depend on capital markets improving for investment and wealth management business turn around. We believe that heavier reliance on interest income should provide stability and predictability to revenue.