UOB - RHB Invest 2017-12-19: Rising SIBOR To Drive 2018 NIM Wider

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UNITED OVERSEAS BANK LTD U11.SI

UOB - Rising SIBOR To Drive 2018 NIM Wider

• SIBOR has risen at end-November, as the market expects US Fed to hike FFR in mid-December. The rise in SIBOR is positive for banks’ NIM, including United Overseas Bank (UOB). 
• We forecast FY18 NIM of 1.8% for UOB, wider than FY17’s 1.77%, and see further NIM upside if FFR rises faster. In addition, the Jan 2018 implementation of IFRS 9 could be preceded by it, possibly writing back some of its GP, just like what DBS did in 3Q17. 
• Our TP, which is pegged to FY18F P/BV (instead of FY17F), is SGD28.88 (12% upside).
• Maintain BUY.

SIBOR spiked up in late-November. 

• Singapore’s short term interest rate spiked at the end of November, ahead of the expected December hike in the US Fed’s FFR. The 3-month SIBOR rose 8.3bps to 1.209% between 28 Nov and 1 Dec. 
• Market expectations are for the US Fed to hike interest rates further in 2018, and we believe this could propel SIBOR to trend upwards, going forward.

Our sensitivity analysis indicates that a 10bps rise in SIBOR could raise UOB’s FY18F net profit by 0.9%. 

• We are forecasting FY18 NIM of 1.8%, wider than the expected 1.77% for FY17, and 3Q17’s 1.79%. If FFR rises at a faster pace, we think there would be a further upside to our FY18 NIM forecast.

There is the possibility that UOB could write back its GP before the Jan 2018 implementation of IFRS 9. 

• Do note that DBS (DBS SP, NEUTRAL, TP: SGD23.33) wrote back some GPs in 3Q17. Whilst UOB’s GP-to-loan ratio is 1.1%, our estimated GP-to-unsecured loan ratio is closer to 2%, way ahead of MAS’ requirement of 1%. Such a possible GP write-back may help to support UOB’s 4Q17 earnings. 
• Our current earnings forecasts are conservative, as we have not factored in this possible GP write-back.

Recent optimism on the residential property market is another positive for UOB. 

• The recent spate of en-bloc property transactions has led to more optimism in the Singapore residential property market. 27% of UOB’s loans are derived from mortgages, higher than the 25% average for the three local banks.
• This development should be positive for UOB’s housing loan growth.

More upside for UOB share price. 

• With market players getting excited from the potential FFR hikes, we believe there is further share price upside potential for UOB. 
• Our GGM-derived TP is SGD28.90 assumes a 8.6% CoE and 10.7% ROE (9M17 ROE: 10.3%). Our TP implies 1.33x 2018F P/BV, higher than the 4-year historical average of 1.13x, which we consider justifiable, as we are in a period of an interest rate-up cycle.

UOB could catch up with its peers after its relative share price underperformance. 

• On a YTD comparison, its total return to investors (inclusive of dividends) was 31%, lower than the three banks’ average of 40%. We believe UOB could catch up on its relative share price underperformance, as investors bet on gainers from interest rate hikes. 
• Risks include higher-than-expected impairment charges and weaker-than-expected NIMs.

United Overseas Bank (UOB) is one of the 2018 Top Stock Picks by RHB Invest.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 28.880 Same 28.880