Positives
+ Net interest income grew 14% YoY. Loans expanded 9% YoY, driven by loans to financial institutions (+25% YoY) and Greater China (+23% YoY). Property related loans remain the largest slice of pie at 50% of total loans, but growth is expected to slow in the next few quarters due to property cooling measures.
+ Lower credit costs at 18bps, as compared to 32 bps a year ago. This decrease is due to the absence of substantial allowances for impaired O&G sector loans in 3Q17. New NPA formation remained around c.S$400m per quarter this year. NPL rose 12% YoY while NPL ratio remained stable at 1.6% (3Q17: 1.6%). Assuming the current benign environment remains unchanged, coupled with the possibility of recoveries, the management’s credit cost guidance of 20-25 bps is reasonable, and we put in our credit cost assumption at 20bps.
+ Higher dividends still in the picture. UOB maintains its 50% payout guidance, subject to a minimum CET1 ratio of 13.5%. 3Q18 CET 1 ratio stands at 14.1%, giving UOB the capacity to award shareholders with higher dividends. We put in our dividend forecast at S$1.20 per share, giving us a dividend yield of 4.8%.
+ Cost-to-income ratio remains stable at 43.4%. Operating expense grew 12% YoY due to higher staff costs (performance-related bonus) and IT-related expenses while operating income increased 8% YoY. CIR is in line with management’s guidance of c.44%. To trend towards a c.40% CIR in the next few years, UOB indicated that it is a two-pronged approach: both interest margins and cost efficiency has to improve.
Negatives
– Funding pressure as UOB bulks up on time deposits; NIM contracted 2bps QoQ. In anticipation of higher interest rates, regional volatility and year-end competition for deposits, UOB has been strengthening its capital and funding position by bulking up on mainly SGD time deposits to meet projected business (SGD LDR lowered to 75.5% as compared to 76.9% a year ago). Total deposits rose S$6.1bn QoQ in 3Q18, of which S$7.0bn came from fixed deposits (other deposits decreased by S$2.3bn). Fixed deposits spiked 4.7% QoQ as compared to the average fixed deposit growth in FY2017 of 1% QoQ. With the bulk of deposits raised being pricier fixed deposit, this could result in a squeeze in interest margins, albeit in the near term. NIM expanded 2bps YoY due to a favourable interest rate environment (Singapore’s NIM expanded 8bps YoY, while Indonesia’s and Greater China’s NIM contracted 25 and 13 bps YoY respectively). Efficient utilisation of this war chest of funds remains to be seen in the next quarter.
– Net fees and commission income was flat YoY. Fee income improved slightly due to loan-related, trade finance and credit card fees which grew 7%, 11% and 9% YoY respectively. However, the improvement was offset by lower wealth management fees that fell 7% YoY as investors’ appetite for financial products turned more cautious.
Outlook
Expect loans growth to remain on target. With the build-up of stronger funding base to lock in their funding position, UOB intends to deploy these funds up for loans growth. Furthermore, assuming the current trade war situation does not take a drastic turn for the worse, the trade war is not expected to pose significant risks to trade loans growth (however, slower transaction volumes is likely in the near term). This is because the bulk of UOB’s loans book is anchored out of the SEA, with the majority of belonging to Singapore (52% of total loans). If the trade war escalates further, UOB might even benefit from an increase in regional trade as compared to the US and China (as companies turn to SEA as an alternative in their supply chain).
Rising interest rates still a key factor. Majority of UOB’s loans book is pegged to floating rates, and as interest rates increase, UOB will be able to reprice its loans. 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.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
Min Ying covers the Banking and Finance sectors. She has experience in external audit and corporate tax roles.
She graduated with a Bachelor of Accountancy with a major in Finance from SMU.
