United Overseas Bank Limited – Steady growth amidst uncertainties August 5, 2019

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: S$25.04 Target Price: S$28.6
  • 2Q19 revenue/PATMI, were in line with our estimates.
  • NIM fell 2bps YoY due to higher cost of funding with an increase in pricier fixed deposits (+7% YoY). LDR healthy at 88.5% (2Q18: 85.7%).
  • Loans surprised on the upside by rising 9% YoY, led by a broad-based increase across all territories and industries.
  • Fee income rebounded (+6% YoY) after two quarters of contraction due to strong wealth management, credit cards and loan-related fees growth.
  • Allowances fell 44% YoY due to write-back in allowances on non-impaired assets. NPL ratio healthy at 1.5% (2Q18: 1.7%).
  • Declared a higher interim dividend of 55 cents per share (1H18: 50 cents per share).
  • Maintain ACCUMULATE with a lower target price of S$28.60 (previously S$30.90). Our TP is based on target price-to-book of 1.3x, derived from the Gordon Growth model. We toned down terminal growth from 2.5% to 2.0% and raised beta from 1.1x to 1.2x.  We lowered our NIM and loan growth forecasts, resulting in a slightly lower ROE assumption of 11.2% (previously 11.4%).

 

Positives

+ Recovery in fee income (+6% YoY) after two quarters of contraction, due to strong wealth management (+21% YoY), credit cards (+12% YoY) and loan-related (+10% YoY) fees growth. We expect growth to stem from WM as AUM rose 9% YoY, reaching $118bn on the back of rising affluence across SEA, with 60% of UOB’s AUM originating from overseas customers. Meanwhile, net trading income grew 14% YoY to S$245mn and gains from investment securities rose to $67mn from a low base of $1mn a year ago.

+ Credit costs for impaired loans stable at 11 bps, unchanged YoY. Overall credit costs fell 5bps YoY to 8bps due to a write-back in allowances on non-impaired assets. New NPL formation remained at normalised levels at $230mn (2Q18: $252mn, 1Q19: $230mn). Asset quality remained resilient with NPL ratio at 1.5% (2Q18: 1.7%). We forecast FY19e credit costs of 19bps.

+ Continued momentum in loans growth at 9% YoY, led by a broad-based increase across all territories and industries. However, housing loans contracted for the first time in four years at -0.4% YoY due to property cooling measures and intense price competition. Geographically, loans growth was mainly contributed by Singapore (+9% YoY), Thailand (+15% YoY) and Greater China (+12 YoY). In the meantime, deposits grew 6% YoY, resulting in an improvement in LDR% to 88.5% (2Q18: 85.7%). We forecast a more conservative FY19e loan growth of 5.1% (previously 5.7%) due to slowing economic growth.

 

Negative

– NIM came in at 1.81%, contracting 2bps YoY but up 2bps QoQ. The YoY contraction was due higher cost of funding from a 7% increase in pricier fixed deposits. However, NIM expanded on a QoQ basis, due to loan repricing and the release of excess fixed deposits (-2% QoQ) as guided last quarter. UOB guided 2H19 NIM at a similar level to 1H19 with a blended effect of loan repricing and better cost of fund management. We lower our forecast for FY19e NIM by 2bps to 1.80%, comparable to 1H19’s 1.80%. We also lowered our FY20e NIM to 1.78% due to expectations of interest rate cuts.

 

Investment Actions

Maintain ACCUMULATE with a lower target price of S$28.60 (previously S$30.90).  Our TP is based on target price-to-book of 1.3x, derived from the Gordon Growth model (long term ROE assumption: 11.2%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%). We toned down terminal growth from 2.5% to 2.0% and increased our beta from 1.1x to 1.2x.  We forecast FY19 DPS of $1.22, giving a 4.7% dividend yield support.

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About the author

Profile photo of Tin Min Ying

Tin Min Ying
Research Analyst
Phillip Securities Research Pte Ltd

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.

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