UOB - RHB Invest 2017-11-30: Rising SIBOR To Drive NIM Higher

UOB - RHB Invest 2017-11-30: Rising SIBOR To Drive NIM Higher UNITED OVERSEAS BANK LTD U11.SI

UOB - Rising SIBOR To Drive NIM Higher

  • SIBOR has risen, as the market expects the US Fed to hike the FFR in mid-December. 
  • The rise in SIBOR is positive for banks’ NIM, including UOB. We forecast FY18 NIM of 1.80% for UOB, wider than FY17F’s 1.77%, and see further NIM upside if the FFR rises faster. 
  • In addition, the Jan 2018 implementation of IFRS 9 could be preceded by UOB possibly writing back some of its GP, just like what DBS did in 3Q17. 
  • Our new TP, which is pegged to FY18F P/BV (instead of FY17F), is SGD28.88 (from SGD27.50, 11% upside). Maintain BUY.

SIBOR has spiked up the past few days. 

  • Singapore’s short term interest rates spiked at the end of November, ahead of the expected December hike in the US Federal Reserve’s (US Fed) federal funds rate (FFR). The 3-month SIBOR rose 5.7bps to 1.182% over the past three days. Market expectations are for the US Fed to hike interest rates in mid-December, and we believe this could propel SIBOR to trend up more, 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 FY18F NIM of 1.80% for UOB, wider an expected 1.77% for FY17, and 3Q17’s 1.79%. If the FFR rises at a faster pace, we think there would be further upside to our FY18 NIM forecast.

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

  • Do note that DBS (DBS SP, NEUTRAL, TP: SGD23.33) wrote back some GP 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 the Monetary Authority of Singapore’s (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 to mortgages, higher than the 25% average for the three local banks. This development should be positive for UOB’s housing loan growth.

Our TP has been raised. 

  • With market players getting excited on the impending FFR hike, we believe there is further share price upside potential for UOB. After rolling over to FY18, we raised our GGM-derived TP to SGD28.88, which assumes 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 interest rate upcycle.

UOB could catch up with its peers after its relative share price under-performance. 

  • On a YTD comparison, UOB’s total return to investors (inclusive of dividends) was 31%, sharply 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.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-30
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 28.88 Up 27.500