United Overseas Bank (UOB SP) - Maybank Kim Eng 2018-02-15: Moving Steadily

UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - Moving Steadily

Although FY17 earnings achieved only 94% of our forecast and missed our expectation, we continue to believe UOB can generate robust earnings growth ahead in a cyclical upturn.
With our revised estimates, sustainable ROE is now 12.1% (11.7% previously), and COE 10.1%, and growth rate 3.5% (both unchanged). Our Target Price is raised 8% to SGD29.33 based on 1.3x FY18E P/BV (from 1.2x previously), in line with its historical mean.
Maintain BUY.

FY17 came up short mainly due to:
1. lower net interest income on lower loan growth of 5% y-o-y and lower lending yields; and
2. higher expenses.
We forecast total income to grow at a 3-year CAGR (2017-2020E) of ~11% from:
1. more lending opportunities (~9-10% vs 7-8% previously) from Singapore and the region. With 50% of loans related to housing and B&C loans (vs. peers’ 42%), it stands to benefit from a recovery in Singapore property market;
2. sensitivity to repricing intervals; and
3. increase in non-interest income from higher WM fees and trading income.
The downside would be higher costs (3-year CAGR of 7%), weighed down by IT investments to build its franchise.
With no major asset quality deterioration, we expect credit costs to ease to 21-25bps in FY18-20E. For every 10bps increase in credit costs, we estimate that FY18-20E net profits could decline by 6%.

Management declared a final one-tier dividend of SGD0.45/sh and special dividend of SGD0.20/sh, bringing total FY17 dividends to SGD1.00/sh (SGD0.35/sh for interim dividend). This is higher than our expectation of SGD0.70/sh.
With current fully-loaded CET1 capital at 14.7% (comfort level: 12.5%), we think there is scope for dividend upside from continued earnings momentum. We raise our FY18-19E DPS forecast to SGD1.00/sh (from SGD0.70/sh).

We like UOB’s disciplined pricing strategy and its sensitivity to re-pricing intervals.
Upside risks are:
1. higher revenue; and
2. lower provisions;
downside risks are:
1. lower income; and
2. higher provisions.
UOB maintained its market share of Singapore’s housing loans from new sales at ~30% (unchanged from a year ago). Management expects FY18E loan growth to improve to high single digits with growth from Singapore, Indonesia, Thailand and Greater China.
We baked into our forecast a 35/20/25bps increase in 3M SIBOR for FY18/19/20E, in line with our Singapore economist’s SIBOR forecasts of 1.55%/1.75% for FY18/19E.
We expect its WM fees to continue at double digit growth in FY18E, given that its organic growth in AUM has been solid (+12% y-o-y), with a faster increase seen in high net worth clients (AUM for HNW clients: +35% YoY).

Sharp and sustained rebound in commodity prices ease concerns about global risks.
Ability to re-price assets at higher interest rates, widening credit spreads.
Proactive restructuring of loans allows asset quality to hold up better than expected, with no major credit slippages.
Higher demand for domestic mortgages from easing of property-cooling measures.

Asset-quality deterioration becomes a systemic problem, especially if job losses in Singapore become pervasive and hurt the mortgage portfolio.
Shocks in the fixed-income portfolio.
Lack of liquidity of a funding currency.
Succession issues.
Major changes in the banking competitive landscape in Singapore that result in the emergence of a dominant financial institution.
Translational losses from MYR/IDR depreciation.
Capital raising by any institution in sector.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-15

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 29.33 Up 27.100